Rural villages digging out a silted-up water tank

India’s new government has apparently decided to restructure the United Progressive Alliance’s flagship anti-poverty programme, the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA). The scheme confers the right to every rural household to be employed in public works for 100 days per year.

There are three reasons why the government wants to reform the NREGA. First, it is considered to be too expensive. Second, the programme is compromised by leakages and corruption. Third, the NREGA has supposedly failed to create durable assets.

The Minister for Rural Development, Nitish Gadkari, proposed to tackle these issues in three ways. First, to limit the NREGA to the 200 poorest districts in the country; second, to increase the amount of resources on the purchase of material and skilled labour from the current 40% of the total budget to 49% (thus reducing the amount of money that can be spent on wages, from the current 60% to 51%); third, to develop better monitoring mechanisms.

The latter provision, although very welcome, is too generic to be commented upon. I will explore the consequences of the proposed changes to see whether they are appropriate to tackle the issues flagged by Gadkari’s Ministry and the consequences on India’s economy.

The claim that the NREGA is an expensive policy is not so obvious. In the last fiscal year, the total expenditure for the NREGA was Rs. 38,598 crores. This amounts to about 0.3% of India’s Gross Domestic Product (GDP). This is comparable with other flagship anti-poverty schemes in developing countries. Brazil’s Bolsa Familia and Mexico’s Oportunidades, for example, cost 0.5% and 0.4% of the GDP, respectively.

Overall, social spending in India is comparatively low. According to the latest World Development Indicators, India spends 4.70% of the GDP in health and education, as against 7.20% in East Asian countries, 8.5% in Latin America and 7% in Sub-Saharan African countries.

India lags other Asian economies too, as far as social protection is concerned. With an expenditure of 1.70% of GDP, social protection spending in India is half that of other lower-middle income Asian countries (3.4%), and less than a third of China’s (5.4%).

What India can afford—and what it cannot

The data strongly suggest that India can afford the NREGA.

The decision to limit the NREGA to the poorest 200 districts in the country will certainly reduce the cost of the programme. However, the combination of this change with the reduction of the available budget for the scheme’s wages, from the current 60% to 51%, will have drastic consequences for employment.

It is safe to assume that the districts where the NREGA will continue will correspond to the 200 districts where the NREGA was first introduced in 2006. In these districts, over the last fiscal year, NREGA wages amounted to 68% (hence material expenditure was 32%). Using the available budget to pay wages reduced to 51% would decrease workdays for beneficiaries by 25 per cent (from 87 crore to 64 crore).

This will, of course, translate into a much lower average number of workdays per household. That is the equivalent of excluding 5 million households from the NREGA (out of 20 million).

If we add the number of households that benefited from the NREGA in the districts that will no longer be covered, the total number of households that will be excluded from the NREGA is close to 30 million. This means that about 150 million people throughout the country will be affected by this decision. If budget allocations remain constant, the total number of households to be covered by the programme would be reduced to about 15 million (equivalent to roughly 75 million people). This would only cover a fraction of the country’s 276 million rural poor.

The consequence on both poverty reduction and the economy at large will be significant.

First, consider poverty. The Rangarajan committee (set up to review the methodology to measure poverty) estimated that whoever lives in rural areas and earns less that Rs. 32 per day is poor. This translates to an annual income of Rs. 11,680. It can be assumed that this reflects the average income of the NREGA wage seeker. The average NREGA income is Rs. 132 per day, or Rs. 5,710 per year per household. This means that, a single person household (an old widow, for example) will lose as much as half of its income. For a family of five, the income falls by about 10%.

Of course, some of these households will find alternative sources of employment. However, between 2004-05 and 2011-12, employment generation in agriculture has been on the decline [see table 8]. Part of this might be attributed to the NREGA itself. But if we consider that the average number of NREGA workdays per household was just 42, we can safely conclude that India’s agriculture does not generate the number of jobs necessary to compensate for the dramatic decline of NREGA employment.

The need for jobs is not limited to India’s poorest districts

The districts where the NREGA will be discontinued are not poverty free. Begusarai district in Bihar or Patan district in Gujarat, for instance, are not in the list of the 200 poorer districts of the country, but the percentage of people below the poverty line is 56.7% and 42.4%, respectively. Using administrative divisions to target the scheme does not reflect the reality on the ground.

Significantly, the average NREGA employment generation in the poorer districts and in “richer” ones is comparable, 43.26 and 42.61 days per year per household, respectively,showing that the demand for NREGA employment is not limited to the neediest areas.

Several studies have demonstrated the positive impact of the NREGA on poverty reduction, as usefully summarised by Dilip Mukherjee. Other impacts include:

•A drastic reduction of distress migration and child labour and a betterment of nutrition levels, especially among children, as shown in the last Global Hunger Index Report.

•The NREGA also had a positive impact on women, who constitute more than half of the NREGA workforce. The 2014 Human Development Report cites the NREGA as one of the reasons why India is moving in the right direction, whereas the 2014 World Bank’s World Development Report calls the NREGA “a stellar example of rural development”.

Excluding millions of households from the NREGA could have dire consequences on poverty reduction and overall development, unless the NREGA is substituted with other forms of social support. However, the recent experiment with direct benefit transfers did not have promising outcomes.

Finally, it is worth analysing the increase of the limit for purchase of materials. The reason for this change, according to the Ministry, is that it is impossible to build durable assets with lower allocations for materials. The evidence about the quality of the assets created is mixed.

This is unsurprising, given the huge number of works completed since the inception of the NREGA is about 12.4 million. Some works are durable and useful, some other are not, although surveys suggest a majority of works belongs to the first category.

Currently, the expenditure for material must not exceed 40% of the total budget, but the actual national average is 27%.

This figure indicates that there is space for increasing expenditure on materials within the existing limits. It is already possible to overcome these limits by converging the NREGA with other schemes. Andhra Pradesh, for example, planted thousands of mango trees by paying for materials through a horticulture scheme and labour through the NREGA. Furthermore, the evidence shows that the main problem is poor planning. Increasing the resources for the purchase of materials will not solve the problem.

A very serious implication of increasing spending for materials is that it will most likely result in increased corruption. Since the introduction of bank/postal accounts for the disbursement of wages in 2008, it has become very difficult to steal from the wage component of the scheme, since the wages go directly to the beneficiary’s account. Three recent surveys show that the diversion of funds meant for the wages is relatively a limited phenomenon.

The bulk of corruption is found in the material component of the scheme, as it is extremely difficult to detect malpractices. Increasing the amount of money spent on material risk aggravating the problem.

All this is not to say that the NREGA should remain as it is.

Many studies show that implementation—particularly in the poorest areas, where it is most needed—leaves much to be desired. However, the solutions proposed by the government will not solve the problems and could have serious consequences in terms of poverty reduction, overall development, and the fight against corruption.

(Diego Maiorano, Phd., is a post-doctoral fellow at the University of Liège in Belgium. He is the author of “Autumn of the Matriarch: Indira Gandhi’s Final Term in Office,” published by Hurst&Co. and Oxford University Press)

Editor's Note: The headline of this article has been changed partially after publication to reflect the fact that it is 150 million individuals affected by job losses and not 150 million rural jobs that will be lost, though it could be argued that there are multiple job losses within a family. There is no change in the article.

Visualisation: Chaitanya Mallapur

Image Credit: Flickr

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