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Business News/ News / India/  Is MGNREGS the answer to the rural slowdown?
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Is MGNREGS the answer to the rural slowdown?

MGNREGS could alleviate rural distress but, in its current form, its overall impact on the rural economy is limited in scope

One of the immediate effects of MGNREGS should be on wages. Photo: MintPremium
One of the immediate effects of MGNREGS should be on wages. Photo: Mint

With rural distress deepening across India and private consumption growing anaemically, calls for ramping up the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), are growing louder ahead of the upcoming budget. Proponents of MGNREGS believe that it may be the only ammunition in the government’s arsenal to fight rural poverty. Critics, though, have labelled the scheme as leaky, wasteful and simply ineffective.

Data on key metrics such as wages, inflation, and consumption suggests that the truth lies somewhere in the middle. While MGNREGS can provide income security to its beneficiaries, its overall impact on the rural economy will be limited unless it is implemented with greater resources and greater care.

The wage impact

One of the immediate effects of MGNREGS should be on wages. In theory, MGNREGS should boost wages by directly providing paid employment to rural households and by providing greater competition for rural wage-earning activities. There is some evidence that this has happened but the extent has been fairly modest. For instance, one 2015 study estimated that the introduction of MGNREGS was associated with a 4.7% increase in rural private sector wages.

One reason for the modest effects could be the low level of MGNREGS wages. At the national level, after adjusting for inflation, there is a sustained and significant difference between average rural wages and MGNREGS wages. Rural wages have largely been nearly double MGNREGS wages over the last decade. MGNREGS wages are not only significantly below rural wages, but are also below the minimum wage in 23 states.

Though a national program, the responsibility of implementation of MGNREGS lies with states. And even in states where MGNREGS has been implemented more intensely, there has been no major gains in real rural wage growth. Here the rough proxy for implementation intensity is the number of person-days per job-card holder, which reflects the total employment provided under the scheme. States such as Tamil Nadu, Chattisgarh, Kerala and Andhra Pradesh have outperformed others on this measure but have had not experienced any major increase in real rural wage growth. States such as Assam, Gujarat, Maharashtra and Bihar have underperformed in implementation and have seen similar wage growth as better performers.

The programme is being throttled by a reduction in the budget and in real wages, according to Reetika Khera of the Indian Institute of Management (Ahmedabad).

“How can you expect NREGA to have an impact when you are not even putting 0.5% of GDP into it?", Khera asks.

Currently, MGNREGS spending is approximately 0.3% of GDP and has steadily declined over the years. In the second term of the United Progressive Alliance, budget allocations towards MGNREGS began accounted for 2.5% of overall government spending on average. This has fallen to 2.3% of overall spend under the current National Democratic Alliance government.

Inflationary risks

A common criticism of MGNREGS is that the money it injects into rural economies fuels rural inflation. But data and research suggest that may not be true. Comparing rural inflation levels with spending on MGNREGS does not show any association.

A 2014 Reserve Bank of India study on MGNREGS found no significant impact on inflation. According to the study, other factors such as hikes in Minimum Support Price ( MSPs) have been bigger drivers of rural food inflation.

The poverty impact

Ultimately, the core goal of MGNREGS is to serve as a safety net by raising consumption and reducing poverty. Given the different factors involved, the extent to which MGNREGS does this is difficult to measure. At first glance, the data suggests no real pattern between rural consumption and MGNREGS. Between 2011-12 and 2017-18, according to data from the National Sample Survey, rural consumption fell across India irrespective of the level of MGNREGS implementation. There is no real correlation between poverty reduction at the state level and MGNREGS either

Yet studies have shown that the MGNREGS can have a positive impact on key rural outcomes. For instance, one national study found that MGNREGS has created valuable public goods which have augmented rural incomes. Another national study found that, even after deficiencies in implementation, MGNREGS may have improved nutrition outcomes.

Even consumption has been shown to improve if MGNREGS is implemented well. A 2018 study of a better-implemented version of MGNREGS in Andhra Pradesh, where there was significantly less leakage or payment delays, estimated that MGNREGS increased income households' earnings by 13% and decreased poverty by 17%. MGNREGS can smoothen food consumption of rural poor by providing them with an alternate source of income during the agricultural lean season.

Implementation issues, such as delayed payments, have hurt the programme’s effectiveness for years. According to the government’s MGNREGS own portal, more than 30% of all wage requests are pending since October 2019.

“The delays in payments have been huge. If people have worked, but not got their wages, it is unlikely to increase consumption in the short run," said Sudha Narayanan of Indira Gandhi Institute of Development Research (IGIDR) who has authored the study on MGNREGS assets.

MGNREGS may never address structural weaknesses in the economy but with greater funding and better implementation, it could provide some much-needed respite to rural India.

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Published: 22 Jan 2020, 03:30 PM IST
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