NREGA: Planning to fail

We have touched upon how the UPA government’s handling of its finances seems to be fiscally imprudent on its part (Bridging The Fiscal Gap: The Capriciousness Continues, Page 24). One of the most striking examples of the government splurging on social schemes and celebrating their success in it (which, in fact, has not really borne any clearly beneficial results) was seen in the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA), which was supposed to ensure job guarantee to the unemployed. The stark reality is however something that really deserves attention and quick remedial action. Here is what the scheme is all about.

NREGA: A Boon Or Bane?

In 2011, the government spent Rs 40000 crore on NREGA, and it plans to increase the amount further this year. While there is no doubt that NREGA has helped improve rural incomes – as indicated by the sharp increase in rural wages – in the seventh year of the scheme’s existence, it appears to have generated as many problems as it had promised to solve.

The worst among these is the ugly fact that it may be ruining work culture rather than enhancing people’s ability to earn more by working more. For a scheme whose purpose is the guarantee of employment, NREGA may be actually generating more leisure than employment. This can be substantiated from the fact that in the initial years, more than Rs 70000 crore was spent on the scheme, which could otherwise have created almost two crore jobs for the needy.

The Problem Of Inflation

Another severe problem that has erupted out of NREGA is inflation. The link between NREGA and food inflation runs like this: as wages rise, farm labour costs and shortages rise, forcing the government to raise food procurement prices. But since few measures have been adopted by NREGA to raise agricultural productivity, prices have nowhere to go but up. This does not mean that NREGA was the main cause of food inflation, but it certainly contributed to the same.

The UPA government has failed to enable farmers to participate in India’s growth. The failure to dismantle the barriers to agricultural marketing and the inability to integrate India into a single market for agricultural goods not only contributed to food price inflation but also undermined the welfare of farmers (for example, farmers receive only Rs 5 for a kilo of tomatoes, while consumers pay Rs 20).[PAGE BREAK]

Wiping Out The Work Culture

Easy money from NREGA has also led to the reduction of people’s need to work. Instead of raising aspirations, which drive economic growth, there is a far-greater-than-expected increase in absenteeism from regular employment and a consequent increase in wage levels in traditional vocations. Instead of working additional hours, enhancing incomes and climbing aspirational ladders, the rural recipients seem to have given up their regular occupations and seem to be satisfied with their current levels of income and consumption.

As per a Crisil report, almost 27.2 million jobs were created between 1999-00 and 2004-2005, and 27.7 million in the five years after that. However, during the earlier period, the number of self-employed people rose by 65.5 million people, whereas in the latter period, the category of self-employed witnessed a dramatic 25.5 million fall.

The interesting point is to figure out how much of the decline in self-employment during 2005-10 is the result of people simply giving up former jobs to take up NREGA employment. They would have done this because the latter offered better terms. However, the purpose of a social security measure is not to get people off a real job and onto dole, but to help them when they don’t have any other means of earning an income.

Public Money Being Wasted!

An example of the village Angaluru in the Krishna district of Andhra Pradesh will illustrate how good money is being thrown away for bad results. Out of the 1000 families in the village, 800 had registered themselves as BPL and sought work under NREGA. So far, it was 100 days at Rs 100 per day. Even at this, 80000 man days of useful work in a year is impossible in a village, that too, year after year. The result is that wages for agricultural labour have gone up 2.5 times, and agriculture is becoming increasingly unviable. Farmers feel that it is better to sell their land and put the money into a bank FD. For instance, one acre of agricultural land sells at a minimum Rs 10-15 lakh. If this is sold and the money is invested in an FD, the annual return is Rs 130000 (approx). By cultivating that land, no farmer gets more than Rs 100000 in a year. So, what incentive is there for cultivation?

Those who are registered for NREGA are mustered just for attendance, and since there is no work to be done they go home, thus paid for little or no work. This easily-obtained money is spent largely on liquor: Rs 15000 crore worth of liquor is being sold in Andhra Pradesh per year. One can guess where the NREGA money is going. This is a social crime.[PAGE BREAK]

The Way Ahead

We are promoting dependency and idleness and destroying the work ethic by promoting instead, a welfare ethic. It is estimated that excluding the subsidy on fertilisers, Rs 4 lakh crore of subsidies and throwaways such as pension for the old are spent under welfare. 85 per cent of that is turning into black money every year, shared by government servants, business men and politicians. More the welfare, more the black money and greater the destruction of the work ethic.

In the pursuit of power, winning elections by spending huge sums has become necessary. These sums can be generated by the vast amounts of money spent on ‘welfare’. For those people for whom politics is a profession and government power is a goal, welfare and the poor are the enablers. Welfare spending for the poor cannot be criticised on moral grounds. However, we are not building an equal society by adapting to these measures. Wealth is being created by the educated and enterprising, and much of it is accruing to politicians in power and their businessmen cronies getting at the levers of power.

This is not good for the country. Ignoble people are choosing politics as the least risky profession to get governmental power and are using it for the accumulation of wealth, keeping the poor opiated by trickles of welfare. The UPA should wake up from its slumber and aim towards providing a healthy work culture and not a welfare culture.

Relation Between NREGA And Inflation

There has been a direct correlation between the rise in the minimum support price (MSP) and food inflation. If we look at the years from 2002-07, the average annual rise in the MSP of rice and wheat was 1.8 per cent and four per cent respectively. However, from 2007-12, the respective figure is a whopping 13.6 per cent and 11.9 per cent respectively. This substantial rise in MSP can also be traced back to one of the most populist policies adopted by the current government, the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA). This act seeks to provide a legal guarantee of 100 days of wage employment in a financial year to every rural household whose adult members volunteer to do unskilled manual work. In the last five years, the budget allocation for NREGA has increased from Rs 11250 crore in 2007 to Rs 40095 crore for FY12.

So, what does this act have to do with rising inflation? Well, the Commission for Agricultural Costs and Prices (CACP) has typically followed a cost-plus pricing formula for determining the MSP. NREGA has fed inflation in two ways. First, the policy like has led to an increase in rural wages. According to the Labour Bureau statistics, agricultural wages in India have risen by a cumulative 105 per cent in the last three years, and this adds up to the cost while calculating the MSP. Secondly, those who received these transfers ended up spending more on food and fuelling demand. This is further accentuated by the fact that food comprises 46 per cent of household consumption spending in India as compared to about seven-eight per cent of household spending in richer countries.

All these policies, in addition to fuelling inflation, are also putting a strain on the national exchequer. An increase in budget allocation to NREGA or higher procurement of food grains by the Food Corporation of India (FCI) and the state agencies makes substantial claims on the treasury and ends up widening the fiscal deficit.