Opinion

NREGA, Food Bill can distort labour market

V Kumaraswamy | Updated on March 12, 2018

NREGA has triggered voluntary unemployment, and raised wages.

They would trigger voluntary unemployment and raise wages in farms and industry.



It appears that collectively we may not have learnt appropriate social or economic lessons from the National Rural Employment Guarantee Act (NREGA) operations.

One would have assumed that the NREGA recipients would adopt it as a supplementary employment opportunity, instead of giving up their regular occupation.

The government's infusion of Rs 70,000 crore through NREGA should have created an additional primary employment for about 2 crore people assuming Rs 35,000 (inclusive of wages, leakage, and material) per person. Given the low savings level in the rural areas — our national average household savings is 18-19 per cent and a lot less in rural areas — and hence a very high level of consumption, the income multiplier is very high.

Even if one assumes a much more sober employment multiplier of three, it should have created 6 crore jobs in the rural areas — capable of wiping out unemployment (and the associated problems such as hunger and malnutrition). But there is hardly any evidence of such a big-bang impact in the rural areas.

Instead, there is a far-greater-than-expected increase in absenteeism from regular employment — organised and unorganised — and consequent increase in wage levels in traditional vocations. Instead of working additional hours and enhancing incomes and climbing aspirational ladders, the rural recipients seem to have given up their regular occupation and chosen to be satisfied with their current levels of income and consumption.



Ignoring social dynamics

This unanticipated and counter-intuitive outcome of NREGA needs to be understood. It is an uphill task to change social behaviour and personal habits of people; even aspirations and desires seem to rigidify with advancing age. Leisure is not the privilege of the rich alone; even the poor fancy such pursuits.

Demand for products depends on aspirations and desires, availability and exposure to temptations, and peer pressure. Clearly, peer pressure among the rural poor is feeble to begin with, and the penetration level of many products in our rural areas, except for shampoos, soaps, toothpastes, mobile phones and sweetmeats, is very low. Desires have been marinated at very low levels for ages of poverty and under-nourishment. Most of the NREGA wages has hence invaded just food, causing high food inflation.

The current Food Bill does not seem to incorporate the lessons from these social dynamics — low aspirations resulting in substitution of employment instead of supplementing it, leading to rising wage levels in traditional occupations, and food inflation. The Food Bill might provide short-term succour, but in the long term both damage the system and stymie individual growth and eagerness to work.

Negative aspects

Let us assess some of the possible negative side-effects of the Food Bill.

Firstly, if farm labour takes the benefits of food security and ‘shrinks' its work to a corresponding extent, we could have a steep increase in agrarian labour costs. Our agriculture, which is already ailing for want of public or private investments or research (the last significant breakthrough came about four decades ago), could hardly cope with a crisis on the key input — labour costs.

Secondly, if the labour takes NREGA and food subsidies and shrinks from other work, labour costs can go up steeply for rural industries which are, as it is, not that competitive. Rural industrialisation may receive a setback.

Thirdly, and perhaps the most dreadful, is the long-term consequence. Like aspirations, desires and lifestyle even lethargy and leisure can be hard-coded into personal DNA. Easy money from NREGA and Food Bill could easily lead to long-term lethargy in people, who are already used to unemployment, under-employment-induced work inertia and might get used to subsidies. Any development or poverty reduction depends in equal measure on individual desire and initiative, and external help and intervention. A Food-Bill type of initiative will blunt the effectiveness of future developmental initiatives.

Fourth, such large infusions into ‘aspiration trapped' markets can cause high food inflation.

Go for skill building

Social security to cover cyclical unemployment or temporary unemployment between jobs, like in the West, may be all right. But it may be an inappropriate medicine for solving chronic unemployment, which can be solved only with expansion of employment opportunities. A more beneficial approach would be skill-building leading to better productivity and lower ‘effective' labour costs.

Luckily India is woefully short — both quantitatively and qualitatively — in several social and economic services that only the Government can render, such as police, justice, traffic regulation, public administration, urban waste disposal, civic administration, among others. Just catching up with the world averages in such social services will create enough primary employment to largely address the unemployment and poverty issues. Fortunately not all government services require high prior education — more on-the-job training would improve the quality of services far better.

The author works as CFO of a paper company.

Published on January 25, 2012

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