MGNREGA badly needs overhaul

There is mounting evidence that Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) of 2005, under which 100 days of guaranteed wage employment a year was to be provided to target households, is failing to meet its stated objectives.

The total cumulative expenditure since 2005 under the MGNREGA is officially estimated to be Rs 1,50,000 crore, and the work provided in person days is estimated at Rs 1,100 crore, equivalent to Rs 136 a man-day, though the labourer receives substantially less; a productive conversion of just 0.73 per cent.

A recent study by R. Jha and R. Gaiha, India’s National Rural Employment Guarantee Scheme as it is — Interpreting the Official Report ,using official data, concludes that “it is difficult to escape the conclusion that the NREGS (National Rural Employment Guarantee Scheme) has not performed well... . It is difficult to rationalise providing even more funds to this initiative.” They also find that “official claims of higher agricultural wage rates and lower migration are mostly exaggerated, if not fantasised…field-report suggests a growing sense of entitlement” (http://goo.gl/Q1Oda).

Perverse yardstick

This sense of entitlement is dangerous as it creates a class of people, mostly young, without skills to contribute to India’s economic progress or their own professional development; it well may adversely impact social cohesion and impede progress towards outcome- or result-oriented public financial management.

There is some academic recognition that the MGNREGA and similar entitlement programmes, as currently formulated and implemented, are detrimental to the overall welfare of households. This is because these programmes tend to consume massive amounts of cash, increase fiscal deficits and public debt, and reduce ability to reorient public expenditure towards more pressing priorities, without providing commensurate economic or enduring social gains. Their aim appears to be for presumed political gains.

There is only a slight recognition that the success of MGNREGA is better measured by the extent to which the number of households needing it decreases overtime, and so that ultimately there is no need for it except for in a few districts. Unfortunately, current policies continue to be geared towards spending taxpayers’ money, without sufficiently taking into account national benefit, at the expense of fiscal consolidation and future fiscal flexibility, and therefore perversely measuring success by the extent to which the size of the MGNREGA increases.

It is in the above context that this article advances a proposal, which has the potential to make the MGNREGA result in skills formation. This will be conducive to more inclusive economic and social development.

idle capacity

The suggestion is to permit labour of targeted households to be made available to agriculture and textiles sectors through a wage subsidy as an additional option. This suggestion will not result in abrupt changes in the MGNREGA’s operations, and will, therefore, not be too disruptive.

The reasoning underlying the suggestion is that to the extent there is idle capacity, or potential to reduce wastage, net economic value (NEV) can be harnessed for the benefit of the country and the people.

The choice of the two sectors is guided by the significant economic size and the untapped potential in both, to improve resource efficiencies and reduce wastage. It is estimated that between 30 per cent and 40 per cent of the agricultural produce is lost between the farm and the retail store. Indicators suggest that lack of power and semi-skilled labour is significantly reducing India’s competitiveness in the textile sector, while the opportunity is available to more than double output in terms of growing domestic demand and export requirements. In textiles, as a rule of thumb, for every Rs 1 lakh invested in the industry, an average of seven additional jobs are created (http://goo.gl/rNfBr).

For the agricultural sector, the suggestion is to make available labour to farm operators during the critical periods involving planting, harvest, packing and transport. The Government could pay a proportion of the annual wage not exceeding what it would incur under MGNREGA directly to the person employed. If such a payment is made through bank accounts as was directed in May 2008, it could contribute to the financial inclusion objective.

fiscal deficit

Wage subsidies to the agricultural sector, that has an annual output of about Rs 2,00,000 crore, could be linked to reducing the wastage from farm to retail stores. If the wastage-reduction target is set at about half the current rate, the supply would increase by Rs 20,000-25,000 crore. This could not only contribute to mitigating food inflation and promoting food security but, given extensive linkages with rest of the consumer and capital goods, the beneficial multiplier effects are likely to be even larger. This in turn could raise fiscal revenues.

The case for using our suggestion of wage subsidies for the textile sector is equally, if not more, compelling. In this case, the Government could consider subsidising labour of targeted households for three months in a year, at a rate equivalent to MGNREGA. The employers could be required to offer employment for at least two years on normally applicable terms. This would generate skills, empowering the labourer thus employed, and result in much higher NEV.

Rough indications are (and these could be refined) that labour costs are around 20 per cent in a typical textile plant. This suggests that Re 1 of labour costs contain Rs 5 of output. Extensive linkages of this sector could produce substantial additional NEV, contributing positively to public finances at all levels of government.

The above proposal views MGNREGA not as a government spending scheme for electoral benefits, but as an instrument to generate skills, and hence employment opportunities, for that alone can empower households and unlock substantial NEV for the benefit of the country. Its acceptance will be facilitated if there is a better level of trust between the Union and the State Governments.

(Ramakrishnan is Managing Director, Organisation Development Pte Ltd Singapore, and Asher, Councillor, The Takshashila Institution.)

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