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Five and growing strong

Five and growing strong
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First Published: Wed, Feb 02 2011. 08 16 PM IST
Updated: Wed, Feb 02 2011. 08 16 PM IST
It is perhaps the single biggest social sector programme in India’s history. Its spending easily dwarfs the budgets of many states and most Union ministries. And depending on your perspective, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) is either the single best thing that ever happened to India’s poor or is an unbridled disaster for the country’s public finances.
Such feeling apart, the curious thing about MGNREGS is that it does not fit into any standard economic paradigm: Marxist; the one based on free markets; and, to an extent, Keynesianism.
Consider the Marxist version. MGNREGS is nowhere close to being a revolutionary programme. Imagine the gap between what an average MGNREGS worker earns and the income of the top 1% Indians. Statistical detail is not germane here, but only a very naïve person will believe that MGNREGS is effecting some redistribution of wealth that will last.
Marxists of an even more extreme persuasion could be made to believe that it is a tool for “saving capitalism” in India. There’s just one problem: India is hardly in the grip of an “underconsumption” crisis—where manufactured goods and commodities remain unsold due to lack of effective demand. This hardly requires propping of the MGNREGS kind. If anything, high inflation tells another story.
Seen from the vantage of markets, MGNREGS makes no sense. Apart from creating frictions in the labour market, it is causing problems rather than solving them. For one, it is has unleashed demand-side pressures seldom seen in the Indian economy—leading to inflation. The scale is gigantic: In 2010-11, 42.5 million households have been provided employment, so far. This number easily dwarfs the employees of the Union government.
The price distortions unleashed in the economy by these numbers defy imagination. This, in turn, has been one reason, among others, for monetary tightening seen for some time now. The chain of reasoning from artificial increases in rural incomes to inflation to clear and present dangers to growth is quite visible.
The one paradigm that comes close to providing a foil to the moral arguments is the Keynesian “digging ditches” model of creating income. So long as the poor are fed, one can always fashion an appropriate argument in a Keynesian vein.
Clearly, MGNREGS proponents have not heard of the inflationary gap beyond full employment even as they attempt linking wages for MGNREGS workers with the minimum wage. Were one not to know of their high moral ideals, one could have been less charitable: They know of labour market frictions and want to exploit them, at the cost of industries and farmers. MGNREGS may be an unqualified social success, but it is yet to acquire economic respectability.
MGNREGS: salvation for the rural poor or trouble for India? Tell us at views@livemint.com
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First Published: Wed, Feb 02 2011. 08 16 PM IST
More Topics: Ourviews | MGNREGS | Rural | Marxist | Keynesianism |