NREGA and Rural India
Varun Khandelwal &
Kanika Chawla
(varun.khandelwal@gmail.com; Summer Intern & LSS Delhi 05)
The National Rural Employment Guarantee Bill received the President’s
assent in September 2005 and has now become a legal reality. Ever since
the Employment Guarantee Bill was tabled in the parliament on the 21st
of December 2004, it has been a vital topic of discussion
among all strata of the Indian society. Many leading economists consider
it as the significant step towards tackling the problems of forced
migration, inadequate infrastructure and extremely high incidence of
absolute poverty in rural
India. In doing so, the National Rural Employment Guarantee Act
(henceforth referred to as NREGA) has the potential to alter the
development path of the entire nation.
As defined by law, NREGA is
“An Act to provide for the enhancement of livelihood security of the
households in rural areas of the country by providing at least one
hundred days of guaranteed wage employment in every financial year to
every household whose adult members volunteer to do unskilled manual
work and for matters connected therewith or incidental thereto.”[1]
How the NREGA Works
The NREGA promises wage employment to every adult person who resides in
any rural area and is willing to do casual manual work at the statutory
minimum wage[2].
The employment seeker has to register with the Gram Panchayat[3]
for a job card that will be valid for a minimum of 5 years. Different
persons belonging to the same household shall share the same job card
which is renewable. All applications must be for at least 14 days of
continuous work. There is no limit on the number of days of employment
for which a person applies, or on the number of days of employment
actually provided to him or her. It is the responsibility of the State
government to provide to every applicant within 15 days of receipt of
his application. Else, it is liable to pay an unemployment allowance to
the applicant at the minimum wage rate.
Problems of rural
India,
previous schemes and the NREGA
A large section of rural India lives on the brink of hunger and
starvation. The most serious problems of rural India are that of
-
Forced Migration (both Seasonal and Permanent)
-
Inadequate infrastructure especially in terms of
water security and connectivity to markets
-
Slow growth in rural employment opportunities as
compared to population growth
The government has consistently been introducing a large number of rural
welfare programmes. Schemes such as Jawahar Rozgar Yojana, the
Swarojagar Yojana, the Sampoorna Grameen Rozgar Yojana and the National
Food for Work Programme have all seen somewhat similar fates. With huge
amounts of leakages and the actual intended beneficiaries getting a
minute proportion of the funds allocated for them, these schemes have
far from achieved their intended goals. The failure of schemes for rural
development can be attributed to various factors such as lack of
awareness among the locals of their rights and entitlements, lack of a
proper legal enforcement mechanism to handle cases of fraud, lack of a
physical auditing system and most importantly – inadequate
implementation due to bureaucratic bottlenecks.
The NREGA differs from all the other schemes in that the legal provision
under this scheme to prevent corruption is much stronger[4]
and several steps have been taken to ensure greater transparency of
operation. The most significant difference between the NREGA and the
other schemes is that the NREGA provides the rural worker with THE
RIGHT TO WORK. The importance of this right for improvement in the
conditions of the poor is understood better when poverty is looked at
through Dreze and Sen’s Capabilities Approach which would immediately
recognise the various unfreedoms such a right can remove.
Various aspects of the NREGA
Fiscal Concerns:
One of the greatest fears as regards the NREGA is its burden on the
exchequer. It is expected to cost from 0.5%of GDP in 2005-6 to 1% of GDP
in 2008-9 or 2.5% of the budget in the year 2004-2005.
It is believed that government will find ways of containing the
expenditure by complicating the application procedures, in spite of the
formal legal guarantee. This is what has happened in
Maharashtra,
where the cost of Employment Guarantee Scheme[5]
has been driven down to barely 0.2% of state domestic product.
Even if the government in full spirit implements the NREGA, the
expenditure incurred is not expected to be futile. Expenditure may be
incurred on infrastructure development activities, which would generate
substantial secondary benefits even years after the completion of the
work.
Well-designed workfare programs under the NREGA will construct
much-needed infrastructure and thus minimize the trade-off between
public spending on income transfers versus public spending on
development.
Also, initially all existing rural-development/poverty-alleviation
schemes will be brought under the umbrella of the NREGA. Thus, while
expenditure will be incurred on the scheme in an accounting sense, in
reality there may be a trivial increase in the share of the budget
actually being spent on rural-development/poverty-alleviation.
Employment Multiplier effect:
This section draws on various works by
Prabhat Patnaik[6].
Let us assume that
India is a demand constrained economy with large amounts of unutilized
resources and a fairly large stock of food grains. The assumption of a
demand constraint economy is particularly applicable to the intended
beneficiaries[7]
of the NREGA who will depend on the public works for subsistence.
Let us define the employment multiplier as the ratio of total
employment generated due to government spending on the NREGA to the
employment generated directly due to the scheme. Now let us estimate
what the value of this employment multiplier when the Government
finances the schemes in the following three ways:
Firstly, the scheme can be financed by increasing the tax on
consumption. However, an increase in tax will potentially reduce demand
else where as it appropriates purchasing power. This implies that the
multiplier effect of demand generated through the employment providing
public work may be negated by the reduction of demand elsewhere due to
taxing away of purchasing power. Thus for every person employed there
should be one person unemployed somewhere else. So, in this case
employment multiplier is one,
Secondly, the Government can finance this scheme through borrowing.
There are several ways the government can borrow the required fund. It
can borrow from the banking system at a low rate of interest via the SLR
funds[8].
Here there is no taking away of purchasing power from any part of the
economy. The expenditure on the scheme will generate multiplier effects.
In this case employment multiplier is greater that one, as employment
created by the NREGA shall in fact lead to increase in demand in rural
areas which will further lead to creation of more employment
opportunities.
Thirdly, the Government can print money in order to raise funds
which will create an effect similar to borrowing and value of the
employment multiplier in this case is greater than one.
If the assumption of a demand constrained economy is true, and we do
have reason to believe that it is true since the income from the NREGA
will accrue to those workers who cannot even afford subsistence level
food consumption[9],
then neither borrowing nor printing money will give rise to significant
inflationary tendencies in the economy.
Growing stockpiles of food-grains:
NREGA can address the problem of a growing stockpile of food grains in
the granaries controlled by the Government. It is a well documented fact
that the Government in India holds food grains far in excess of the
quantity required to achieve food security[10].
Over time this stockpile of food would decay. The NREGA offers the
Government the opportunity to use this excess of grains to finance
labour for development of rural infrastructure. NREGA would raise
off-take of grain in two ways - directly when wages are paid in grain
and indirectly by putting incomes in the hands of the poor. Utilisation
of excess grains to finance the scheme will serve two purposes:
-
Paying a part of the wages in grain will avoid the inflationary
tendency in other wage goods that may arise due a sudden transfer of
purchasing power
-
It will reduce the outlay on food subsidy by significantly reducing
the carrying cost of grain. Today, nearly 66 % of the food subsidy
comprises the ‘carrying cost’ of grain[11].
Thus, the NREGA will provide the Government with a means to reduce
expenditure on the current account and improve the fiscal health of
the Government.
Water Security and Market Connectivity:
Rural
India faces an increasing problem of water security both due to lack of
irrigation infrastructure and the vagaries of the monsoons. Water tables
all over the country have been falling due to over-exploitation of
ground water resources. Economist Mihir Shah believes that the NREGA
offers a ‘historic opportunity’ to address this problem[12].
The expenditure on public works under the NREGA can be directed towards
construction of irrigation apparatus which would thus alleviate the
problem of water security to some extent.
Following an analogous logic, the funds allocated under the NREGA may be
used for development of roads thereby connecting villages to national
highways and thus facilitating connectivity with markets. While the
roads constructed using labour intensive techniques may not be
comparable in quality to the city roads, they will certainly serve the
purposes of the village economy and stimulate it at the same time by
creating demanding for labour and raw materials.
Rural-Urban Migration:
The NREGA, by guaranteeing employment, will alleviate
the problem of rural-urban migration. The NREGA will have significant
positive impact on seasonal rural-urban migrations by providing rural
workers with employment during the lean season. This will reduce the
problems of excessive population pressures in Indian cities as surplus
rural labour will find employment in their own districts. The NREGA will
also have an impact on permanent migrations trends. While it is
difficult to ascertain what the exact impact will be, one can assume
that the created infrastructure and the increased activity in the rural
economy due to increased purchasing power will lead to higher rates of
permanent job creation and thus mitigating the urgency to migrate.
Development of Human Capital:
The public works that will be undertaken
under the ambit of the NREGA have the potential to develop human capital
by promoting skills in rural
India. This may be through ‘learning-by-doing’ kind of processes or
through formal training of the workers by experienced/trained personnel.
Whatever be the case, skill formation is a desirable social goal per se
and will, in the long run, reduce the dependence of the rural population
on agriculture by enabling them to move on to other activities[13].
Micro-theoretic Perspective:
One of the most remarkable features of the NREGA is
that, in contrast to most other schemes, it will not distort consumer
preferences by direct price administration/subsidisation. The NREGA is
designed to operate using lump-sum transfer. This will enable the
markets in rural
India to remain efficient in line with the First and Second Welfare
Theorems.
Conclusion
It is sometimes said that the opposition to NREGA lay neither in the
scarcity of resources, nor in the contention that a reasonable and
practicable piece of legislation could not be conceived; it lies in the
fact that such an Act is contrary to the entire direction of neo-liberal
reforms. This aversion may be due to the fact that international capital
has a strong distaste for the excepted inflation and exchange rates
fluctuation resulting from Keynesian demand management.
The issue of the cost of the scheme maybe a little exaggerated. A large
portion of the outlay under NREGA may (and probably will) be sourced
from amalgamation of other schemes into the NREGA. This would bring the
expenditure on employment and infrastructure within the purview of the
NREGA. Other schemes of the Government would also become more efficient
and productive once are brought under the legal framework provided by
the NREGA. Also, the NREGA has tremendous potential in eliminating the
trade-off between rural income transfers. The possibility of resolving
the problem of accumulating grains with the Food Corporation of India
and resolving the issue of water security and inadequacy of rural
infrastructure is also very attractive.
At the same time one needs to watch the political behind the
implementation of the scheme with caution. The entire exercise of
planning and the resources put into the scheme can go to waste, as has
been the case with many Government schemes. The reliance on local
governance structures and the accountability, both in the NREGA and via
the Right to Information Act (2005), lend some strength to the hope that
this scheme will not be a merely fulfilling of the Common Minimum
Program and will vindicate its use as a tool in furthering the economic
development of India.
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[1] Ministry
of Law and Justice, 2005. National Rural Emplyment Guarantee Act
2005. The Gazette of India (September 7, 2005). New Delhi:
Government of India Press.
[2] The
minimum wage for the purpose of the Act is Rs. 60 per day. The
minimum wage, however, may be higher depending on the district-level
poverty line.
[3] The ‘Gram
Panchayat’ is a local governance body at the village level.
[4]
Also, when the legal provisions of the NREGA are coupled with the
recently enacted Right to Information Act (2005), there exists hope
for much lower degrees of corruption in the implementation.
[5] The
Maharashtra Employment Guarantee scheme is a similar (and the only)
scheme in India to the NREGA.
[6] An
eminent economist based at the Jawaharlal Nehru University, New
Delhi, India.
[7] The
intended beneficiaries of the NREGA will be “below the poverty
line”. Any purchasing power transferred to them will primarily be
spent on subsistence level wage-goods in which the assumption of
demand constrain holds.
[8] SLR
is Statutory Liquidity Ratio and is an important part of the banking
regulations. To put it very simple, banks have to invest a certain
fraction of the deposits received in designated securities.
[9] As
they are below Poverty Line. The Poverty Line is calculated by
considering the minimum calorific requirements of an individual
which is translated in to an equivalent amount of money required to
purchase food that supplies the minimum calorific requirement.
[10]
This is not an intentional accumulation on the part of the
Government. The excess stock has accumulated due to the commitment
of the Government to buy grains from farmers at a minimum support
price which is sometimes even above the market price. Thus, all
excess low-quality stock of grains is purchased by the Government.
[11]
Abhijit Sen Committee Report. 2002. Report of the High Level
Committee for Formulating a Long-term Grain Policy. New Delhi:
Union Ministry of Consumer Affairs, Food and Public Distribution,
Govt. of India.
[12]
Shah, M. 2004. National Rural Employment Guarantee Act: A
historic opportunity. Economic and Political Weekly (Dec 11,
2004). Mumbai, India: Sameeksha Trust.
[13]
Which may originate from the NREGA or autonomously.
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