(Mis)Leading attack on MNREGA

Despite high profile calls for phasing out the India government’s Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA), analysis by IGC economists suggests the argument is based on exaggerating the costs of the programme and down-playing the benefits. The case highlights the need for evidence based research to inform public policy

Jagdish Bhagwati and Arvind Panagariya have argued for phasing out the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) in favour of cash transfers. It’s surprising that two eminent economists have chosen to make a case based on prior beliefs rather than on the available evidence.

Bhagwati and Panagariya’s main point is that MNREGA is an inefficient "instrument of shifting income to the poor". They even claim that it costs five rupees to transfer one rupee to MNREGA workers.

Their argument: consider a worker who currently earns Rs. 80 a day in the private sector but decides to work on MNREGA for Rs. 130 instead. She earns an extra Rs. 50, but this costs the government Rs. 248: Rs. 130 in wages, Rs. 56 in material (assuming a material-labour ratio of 30-70), and Rs. 62 in leakages (assuming 25% of expenditure is embezzled).

This argument is misleading.

Inflating costs, deflating benefits

The first concern is whether potential MNREGA workers have alternative gainful employment. Often they don't, as MNREGA work is provided mainly in the slack season. This is especially true for women — more than half of all MNREGA workers. With involuntary unemployment, the question of “currently earning Rs. 80 a day in the private sector” does not arise: so the income gain is Rs. 130, not Rs. 50.

If, for the sake of argument, workers do currently earn Rs. 80, it is only true that the gain for the MNREGA worker is Rs. 50. However, what matters is the impact on income, direct and indirect, for all workers. In this scenario, there will typically be a wage increase (though not "by leaps and bounds", as attributed by Bhagwati and Panagariya to mysterious propagandists), which benefits all employed workers. This is possible even when MNREGA employment is wholly concentrated in the slack season, if higher slack earnings tighten peak labour supply. Even small increases in the market wage translate into huge aggregate benefits, given the size of the labour force under consideration. In short, only extreme assumptions — unspecified by Bhagwati and Panagariya — would yield a net gain as dismally low as they claim. The possible cost-raising impact of wage rise for poor landless workers that some people worry about is far surpassed by the inflationary consequeces of budget deficits to subsidise rich farmers.

Second, Bhagwati and Panagariya ignore non-transfer benefits, starting with MNREGA assets. Rural roads, soil conservation, flood control, groundwater recharge and land improvement projects may not shine as brightly as the smart cities Bhagwati and Panagariya so enthusiastically endorse, but they do contribute to India's development. A recent study of over 4,000 MNREGA assets across Maharashtra, by the Indira Gandhi Institute of Development Research, found that most of them are valued by local residents. Bhagwati and Panagariya assume they are all useless. They also ignore the evidence on other benefits: for instance, empowerment of women who work in large numbers, reduction in distress migration and impact on schooling achievements (these latter achievements have been recently estimated to be as large as that of the much-lauded conditional cash transfers in Latin America).

In other words, Bhagwati and Panagariya 's argument is based on inflating the costs of MNREGA and deflating the benefits. This biased accounting spills over to their espousal of cash transfers: how a cash transfer system will identify the poor is glossed over, as is the inherent self-selection advantage of MNREGA (clearly only the most needy are willing to do hard manual work), which after all provides a conditional cash transfer. If Bhagwati and Panagariya intend cash transfers to be universal, there would be enormous leakages in terms of transfers to the well-off.

Bhagwati and Panagariya ought to be well aware that all districts in India have a large number of poor. Yet, they support the government proposal to restrict it for 200 poorest districts. This is because they believe that MNREGA is a wasteful scheme without any redeeming merit; as an income-transferring scheme it is inefficient and its main claim to fame - ‘self-selection’ - seems to be inoperative. As evidence of the latter, they point out that a large poor state like Uttar Pradesh (UP) generates a lower percentage of total MNREGA employment than smaller and richer states like Andhra Pradesh and Tamil Nadu. It is important to realise here that ‘self-selection’ can generate the ‘demand’ but not the ‘supply’ of employment. Indeed, there is excess, unmet demand for these schemes; the government typically does not have enough resources or administrative capability to meet that demand. National Sample Survey (NSS) data for 2009-10 shows that in UP only 16% of rural households got work, even though 35% wanted to work. This is not surprising: in poor areas governance is also poor. That calls for improving governance, not scuttling the programme, and after all, the new government has been elected on the promise of improving governance. The proposed restriction to poorest districts will also have to grapple with this governance problem. For India as a whole, among the poorest two quintiles of rural households, over 40% of those who want MNREGA employment did not get it. Even in the richer states such as Punjab, Haryana and Gujarat, 31%, 20% and 38% (respectively) want work under MNREGA. These poor and underemployed are no less deserving of employment simply because they happen to live in a relatively richer district or state.

Shortcomings of MNREGA

The shortcomings of MNREGA implementation have certainly been reported: these include delays in wage payments, benami payments, unmet work requests and material irregularities. Yet numerous careful studies based on independent household survey data have shown significant benefits in terms of income security for the most vulnerable. MNREGA provides employment to some 50 million rural households, affecting the lives of up to 250 million individuals. When more than 90% of the workforce is informal and lacks access to social security, this is a critical intervention. Leakage rates remain substantial, but they are declining and no higher than in many other subsidy programmes.

We share Bhagwati and Panagariya's lament about "the folly of embracing substantial spending programmes unmatched by revenues", but not their astonishing inference that "this alone justifies the decision to confine NREGA to the 200 poorest districts". To put matters in perspective, consider estimates by the National Institute of Public Finance and Policy (NIPFP_ of total “non-merit” subsidies (implicit and explicit, Centre and states) to the better-off in India: about 9% of Gross Domestic Product (GDP), over 20 times the expenditure on MNREGA (less than 0.4% of GDP). Bhagwati and Panagariya would be doing us all a service, therefore, by taking their lament elsewhere. Surely, there are better ways of ensuring fiscal responsibility than to deprive millions of workers of an important (and sometimes crucial) source of livelihood.

We do not claim that all is well with MNREGA. The programme needs better design and implementation, not slow suffocation. And certainly the public debate is not well-served by facile attacks uninformed by the facts.

A shorter version of this article has appeared in Times of India.