In today’s newsletter, we’ll talk about why there's been so much chatter about the well-intentioned National Rural Employment Guarantee (NREGA) Act.


The Story

The National Rural Employment Guarantee Act (NREGA) scheme was introduced in 2005 with a simple promise- to provide unskilled manual work to any rural adult who demands it. The person making the demand is provided with 100 days of work. And the promise is met within 15 days of the demand having been made. In case of a delay, the worker is entitled to unemployment compensation. To top it all off. It’s highly inclusive. It provides equal opportunity for women and people from marginal communities and workers can avail the scheme even if they are employed elsewhere. For instance, if you’re working on farmland, there won’t be a lot to do when it’s not peak harvest season. However, you can avail the benefit from the NREGA scheme nonetheless and your wage will directly be credited to your bank account.

And truth be told, NREGA was a game-changer in the early years. Rural wages increased, poverty took a backseat and there was a visible change in migration patterns. Fewer people were moving from farmlands to urban centres because they had avenues to earn a decent wage back home. And it did not just benefit the individual. It benefited the collective. With better income, we saw rural consumption pick up and the agrarian economy saw a temporary spurt.

Eventually, though, the implementation challenges took centre stage.

The first problem — low wage rates. NREGA wages are currently around Rs. 180 per day, which is far below the market rate. For almost a decade, the wages have been adjusted only for inflation, ignoring the average wage rate for the same kind of work. And right now they have fallen below the minimum wage rate in 23 states, leading to a dip in participation. So now the Government is looking at linking these wages to a consumption-based index- one that is revised annually. The idea is that this way the wage workers can be compensated adequately based on their consumption needs. This may be a better approach.

Another issue is that despite the scheme mandating that workers be paid within 15 days, these people often don’t get paid at all. The past few financial years have opened with a large balance of wage arrears- nearly Rs. 10,000 crores in 2019–20. According to the government’s portal, over 30% of wage requests have been pending since October 2019. And this creates a vicious cycle. You don't pay the dues from last year. So you run a deficit. And when you get the money this year, you end up spending most of it compensating for last year's dues. For instance, in 2019, NREGA was allotted a budget of Rs. 60,000 crores. 75% of it was spent even before the first half of the year was complete. You can see the problem here.

Now this entire wage arrear issue can be attributed to a lack of adequate funding. Though it is a national program, states are responsible for implementing the NREGA. And the Central Government has been grossly underfunding them for years by putting a cap on the amount that states receive.

But then there is another contention. Maybe there’s a reason why the Central Government is so tentative about spending money here. The NREGA scheme guarantees 100 days of work to any worker who asks for it. But what happens when there is no work? Well, states are still mandated to provide some kind of labour. So most officials simply offer pointless busywork that adds no value to the agriculture infrastructure in the country. It’s like asking people to dig holes and fill them up in order to tick a box.

In a lot of ways, this is free money. And when people have more money on their hands, they’re bound to spend it. The problem is, when consumption increases without any commensurate rise in economic activity, it leads to inflation. At least, that’s what people claim. But this argument is not entirely based on empirical evidence. In fact, a report from the RBI suggests the exact opposite explaining how rural inflation might not necessarily be linked to the NREGA scheme.

But in all honesty, the NREGA right now is still littered with problems. Perhaps the biggest issue with the scheme is that even if the funding allocation increases, it’s very hard to root out corrupt middlemen from the system. So no matter how hard we try to fix this program, it probably won’t happen unless we have a watertight system to root out corruption.

Hopefully, the government has a plan in place before they ramp up spending on NREGA once again.

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