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ExplainSpeaking: What ails MGNREGA and what it means for the Indian economy

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Dear Readers,

Last week, two organisations that track the implementation of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) brought out a report — called MGNREGA Tracker — by using the government’s Management Information System (MIS) data. These two organisations are the People’s Action for Employment Guarantee (or PAEG, which is an umbrella organisation for several activists and academics who initially lobbied for the rural employment guarantee scheme and now track its implementation) and LibTech India (which brings together engineers, social workers and social scientists interested in improving public service delivery).

This is the fourth such “tracker” on MGNREGA and it is significant for the simple reason that MGNREGA’s performance is possibly the most important proxy for the health of the informal economy, which accounts for anywhere between 80% to 90% of all employment in India.

Before we look at the main takeaways from the latest MGNREGA tracker, it is best to understand what is MGNREGA, why was it started in the first place and why is it so heavily politicised.

A brief history of MGNREGA

The MGNREGA was enacted in 2005 by the Congress-led UPA government. But it faced a lot of opposition within the ruling coalition, especially within the Congress.

“The draft NREGA entered national policy debates in India… like a wet dog at a glamorous party,” wrote Jean Dreze, who was one of the main architects of the Act, in 2010.

Eventually, however, it was seen as a response to the deep economic distress that existed in rural India where farming was proving to be increasingly unremunerative even as cities failed to create adequate job opportunities. Thus, MGNREGA was started to provide a lifeline to millions of rural households. It did so by the government providing 100 days of “guaranteed” employment in a year to any rural household (or family) at minimum wages.

While the Congress-led UPA government believed that fast economic growth will eventually reduce poverty and bring prosperity, it did agree — albeit after a lot of internal wrangling — that in the meantime there should be some kind of safety net for the millions of rural Indians who may not benefit immediately from economic growth.

Broadly speaking, it was thought that between a bare minimum payout through this rural job guarantee scheme on the one hand and the expansion of subsidised food grains on the other, the government would be able to make the growth process — which was to a great extent unequal — more “inclusive”.

Soon, MGNREGA’s “performance” became the most visible measure of the economy’s health. It was expected that if the Indian economy is booming and creating new jobs, one should expect less demand for jobs under the MGNREGA. Conversely, if the economy is struggling, MGNREGA would see exalted levels of activity.

As it turned out, MGNREGA continued to gain in popularity among rural Indians during a phase of India’s economic life when the country witnessed its fastest GDP growth.

However, Prime Minister Narendra Modi came to power in 2014 after berating MGNREGA (as well as the National Food Security Act or NFSA, which provides for subsidised food grains to the poor); he described them as the “politics of dole”.

His vociferous criticism was not in isolation. There were many who argued that MGNREGA payouts were making Indians lazy and taking away the incentive to migrate and work hard while also raising the cost of doing business for business firms.

In fact, in February 2015, the PM mocked the Congress party for needing MGNREGA.

“My political acumen has told me to keep it alive as a monument to your failures since Independence. After 60 years, you are still making people dig holes,’’ he had said.

Oddly enough, PM Modi’s statement not only captured the harsh reality of India’s economic growth but also explained the rationale for MGNREGA. Not surprisingly, be it the aftermath of demonetisation or the Covid-induced disruption, MGNREGA and NFSA continue to be the go-to schemes every time the BJP government senses economic distress.

However, such starkly opposite views by the principal political parties have made MGNREGA a highly politicised intervention.

Main takeaways from the latest ‘tracker’

Here are some of the key findings.

1. Inadequate Allocation and repeated payment delays

The first finding has to do with the Government of India not allocating adequate funds for MGNREGA in the Budget for the current financial year. According to the PAEG, the total budget allocation for MGNREGA this year was 34% less than the revised budget of the last financial year (2020-21).

At one level, this is hardly surprising since this year’s (2021-22) Budget even saw the central government cut down the health budget by 10%. If the government can cut the health budget by 10% immediately after being struck by the Covid pandemic, it is hardly surprising that the MGNREGA budget was cut by 34%. Presumably, at the time of the Budget — February 1, 2021 — the government thought the pandemic had ended and the economic recovery would start in full flow from April onwards.

Of course, as it turned out, from April onwards, it was the Covid pandemic that surged, not the economic recovery. That is why, as of September end, the government had already spent 90% of its MGNREGA budget.

What’s more, it is in this dire state even though the demand for MGNREGA jobs is down 25% from last year (see the chart below); it is noteworthy, however, that the demand is still higher than the pre-Covid period.

Person days of work generated

Part of the problem, as pointed out by researchers at LibTech, led by Rajendran Narayanan (who teaches at Azim Premji University), is that since the inadequate budget allocation is an annual occurrence, each year’s Budget allocation also has to contend with the previous year’s arrears or unpaid dues. In the current year, for example, of the total allocation of Rs 73,000 crore, over Rs 17,000 crore will be used just to pay off the payments to rural poor for the work they did in the last financial year. This is again a regular occurrence (see the chart below) even though these thousands of crores of rupees is what the Government of India owes to some of the poorest Indian households, most of whom may not be earning even Rs 10,000 per month.

Percentage of budget spent clearing previous year liabilities

According to PAEG, funds remaining as of September end can cover at most 13 days of employment per household until the financial year ends in March.

In fact, as the table below shows, there are many states — such as West Bengal, Andhra Pradesh, and Tamil Nadu — that have a negative net balance of funds remaining. This places a question mark on the possibility of effective implementation of NREGA in these states for the rest of the year.

Many states have a negative net balance of funds remaining

To be sure, it is not the states that have to pay. As per the Act, all the labour wages are to be paid by the central government. In the past, the Supreme Court has pulled up the central government for causing delays in wage payments.

“The wages due to the worker…must be transferred immediately and the payment made to the worker forthwith failing which the prescribed compensation would have to be paid. The Central Government cannot be seen to shy away from its responsibility…” stated a 2018 order by the apex court.

2. Demand suppression

Another key takeaway is that inadequate allocation has a detrimental impact on people asking for a job. That’s because — argue the researchers to study the MGNREGA work sites — people seeking MGNREGA work cannot afford to not be paid for so long.

There are two important legislative provisions of MGNREGA. One, work should be provided within 15 days of demanding work failing which the workers are entitled to an unemployment allowance. Two, workers should be paid within 15 days of completion of work, failing which they are entitled to compensation for the delays.

If due to inadequate budget allocation and resultant delays the rural workers do not get their dues in time, it discourages them to the extent that they do not ask for as much work as they would want to.

There is an additional factor.

There is little clarity on how and why MGNREGA budgets are decided, says Narayanan. Once an arbitrarily low number is chosen, officials are discouraged from even registering all the demand for jobs.

According to Narayanan, the scale of such unmet demand is around 33%.

He points out that typically this trend starts from the second quarter (July, August, September) onwards. That’s because by this time budget allocations are largely exhausted and officials have to stretch out whatever money remains.

Of course, repeated governments — both UPA and NDA — have argued that MGNREGA is a “demand-driven” scheme. As such, if there is greater demand, a higher allocation can be made in time. But researchers studying the implementation on the ground state that the initial allocation is of critical importance. If it is low, it delays payments and eventually suppresses demand.

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3. Caste-based payment delays

This is perhaps the most unique finding of this year’s MGNREGA tracker — thanks largely to an odd demand by the central government.

In March 2021, the central government came out with a circular asking state governments to send three bills, officially called Funds Transfer Orders or FTOs, instead of just one for MGNREGA payments. So, instead of a single FTO stating that, say these 100 people have completed the work and that they should be paid their wages, the Union government has asked states to give 3 FTOs — one each for MGNREGA workers belonging to “SC” (Scheduled Castes), “ST” (Scheduled Tribes) and “Other” categories.

It is still unclear why the government chose to do so. But when LibTech did a fairly representative sample study — of over 1.8 million FTOs over 10 states between April and September this year — they found that, after the Caste-based circular, workers belonging to the “others” categories ended up facing much longer delays in payments. This is crucial because workers belonging to the “others” category account for over 87% of all MGNREGA workers.

Look at the chart below to understand how different caste categories got hit by delays in payment. The yellow line corresponds to the “others” category and it shows that a lower percentage of such workers got their money within the stipulated time. What is worse, this percentage is falling with each passing month — as Narayanan argued.

Delays by caste over time

Look at the chart below which details how the payments were delayed by caste for each of the 10 states. Jharkhand, Odisha, and Madhya Pradesh saw a particularly poor record of payments for non-SC, non-ST workers.

How the payments were delayed by caste for each of the 10 states.

What is the upshot of these findings?

Jayati Ghosh, Professor of Economics, University of Massachusetts, Amherst, says that “India’s economy cannot really recover until domestic demand recovers, and that in turn requires a recovery in mass consumption, which had been languishing even before the pandemic and since then has been devastated. The NREGA can play a critical role in reviving this for rural India — and we know that this feeds into urban demand as well over time.”

Ghosh argues that Indian policymakers should not be blinded by surging foreign inflows and equity markets.

“The high capital inflows are the result of the massive liquidity expansion in advanced countries along with low interest rates, which have led global finance to search for quick returns wherever they can be found. This is highly mobile capital, which is likely to depart at the first sign of changed conditions (such as tighter monetary conditions in the US and other advanced economies) — but it is also very expensive capital since India pays higher interest rates and dividend rates on such inflows than it earns on its investments abroad, including RBI holding its increasing forex reserves in safe but low return foreign assets like US Treasury Bills. So the rise in capital inflows and in the stock market is not of much use if they do not lead to higher investment in productive assets in India. Instead, they can indicate bubbles that can burst with even slight changes in expectations,” she warns.

She states that the delays in wage payments are a very serious issue. “We now know through the work of LibTech that much of it is because of central government delays.”

The caste-based wage payments make no sense, she says. “They go against the universal nature of the programme, lead to more bureaucratic work at the lower levels and delays, and create unnecessary grievances,” she points out.

To be sure, many ground-level researchers pointed out that these delays have resulted in caste-based tensions at work sites. For instance, if an MGNREGA worksite manager belongs to an SC or ST category and the bulk of the “other” category workers face wage payment delays even when SC & ST workers receive their wages sooner, it naturally creates social friction. Over time, such discrepancies may discourage non-SC, non-ST workers from demanding work at the MGNREGA work sites.

In the end, Ghosh underlines the importance for the Indian government to redouble its efforts towards MGNREGA and NFSA.

“The free food grain was important but insufficient given the need (and the capacity of the FCI which is holding food reserves several times the buffer stock requirement). We know that around 100 million deserving people were excluded from this anyway. But if the macroeconomic intent is to revive domestic demand, this is nowhere near sufficient. A self-targeted programme like NREGA that puts money in the hands of workers who will almost definitely spend all of it is quite different: in addition to immediate improvement of lives and better bargaining conditions for rural workers, it can have very strong positive multiplier effects that generate a wider expansion of the economy.”

It would appear that India’s economic recovery is a tale of two nations.

Stay safe

Udit

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