Earlier this week, the government proposed major changes to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) through the introduction of a new bill in the Lok Sabha. The Viksit Bharat-Guarantee for Rozgar and Ajeevika Mission (Gramin) (VB-G RAM G) Bill, 2025, proposes to increase the employment guarantee under the rural employment guarantee scheme. In 2025-26, the central government allocated ₹86,000 crore to MGNREGS, one of the biggest expenditure items in its budget. The new rules will reduce the scheme’s availability. They will also dramatically alter its funding pattern, increasing the burden on states and giving the Centre more discretion in allocations.
10% to 40%
Under current MGNREGS norms, the Centre bears the full cost of unskilled wages paid under the scheme and 75% of raw material cost. Over the last two fiscal years and the ongoing fiscal year, wage costs have accounted for around 66% of scheme expenditure and raw materials a further 31%. Assuming the central government paid 75% of raw material costs, this implies it is currently bearing about 90% of the overall scheme expenditure and states the remaining 10%.
Under the revised norms, the total cost of the scheme in any given year will be shared between the Centre and states in a 60:40 ratio, causing the burden on states to rise threefold. Two other clauses have cost implications for states. One, if states are unable to provide employment to a worker within 15 days of asking, they are liable to pay unemployment benefits. Two, the Centre will decide the normative budget allocation for each state; spending by states over that will have to be funded by them.
Pushing up deficits
States are staring at a higher outgo. If the new 60:40 formula for all costs had been applied in 2024-25, states would have faced an additional burden of around ₹31,000 crore, increasing the total state expenditure by around 0.54%. MGNREGS has been especially important during times of economic crisis, such as the covid-induced lockdowns of 2020 and 2021. In 2020-21, under the new fund-sharing arrangement, states would have faced an additional liability of around ₹40,000 crore, amounting to an increase of slightly over 1% of total expenditure.
This potential additional burden comes in the backdrop of states lowering fiscal deficit in the last few years. “State governments have made commendable progress towards fiscal consolidation by containing their aggregate gross fiscal deficit within 3% of gross domestic product (GDP) for three consecutive years (2021-22 to 2023-24), while restricting revenue deficit at 0.2% of GDP in 2022-23 and 2023-24,” said the Reserve Bank of India in 2024 in its annual review of state finances.
State burdens
What about the state-wise burden? Based on state releases of funds for 2024-25, and assuming the 60:40 formula, the biggest increase in liabilities would have been for Uttar Pradesh ( ₹4,239 crore), followed by Andhra Pradesh ( ₹3,269 crore), and Tamil Nadu ( ₹3,211 crore). Smaller states have been excluded from this analysis. That’s because for states in the Himalayan region and the North-East, the Centre’s share in costs has been retained at 90%.
Interestingly, even as the government aims to repeal the employment guarantee scheme and bring employment guarantee under the ambit of centrally sponsored schemes, the RBI, in its report on state finances, cautioned that “too many central government schemes reduce flexibility of state government spending and dilute the spirit of cooperative fiscal federalism. Rationalization of centrally sponsored schemes (CSS) can free up budgetary space to meet state-specific expenditure needs and reduce the fiscal burden of both the Union and state governments”.
Letter, not spirit
Under the proposed new norms, guaranteed employment under the scheme will increase from 100 days per household per year to 125 days. While this is an improvement on paper, the reality is that no state outside the Nort-East has provided households with 100 days of employment even under the current dispensation. In 2024-25, apart from Kerala, no other larger state provided more than 10-15% of households who availed of work with the full 100 days of guaranteed employment.
One reason for this could be economic conditions. It is possible that the bulk of households simply did not demand 100 days of work from state governments because they found better employment elsewhere. While this is possible, it’s worth noting that even during covid, when rural India faced serious distress, the bulk of households still did not complete 100 days of employment in MGNRGES works. Under the new norms, job guarantees under the scheme will not be available for a period of two months during the busy agricultural season.
State limits
A job guarantee effectively sets a floor to the rural wage rate and forces farmers to offer a higher wage to agricultural labour. In the past, critics of MGNREGS have claimed that this has raised farm costs and ultimately final costs to consumers. However, on the flip side, it has also forced up wages for one of the poorest sections of the rural workforce. In the last six years, the average days worked by households has ranged from about 40 days to about 51 days, including the covid years. So far this year, 35 days of employment per household have been given.
It is highly unlikely that the 125 days will ever be reached for a significant proportion of households, even during periods of rural distress. This is not because households have better options and don’t demand work for those many days, but because states will simply be unable to face the fiscal burden. A further disincentive is that it is the Centre that will decide fund allocations to each state, with the latter having little say.
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