The Rs 2,66,000 crore NREGA boondoggle; for every Rs 5 spent, the poor get Re 1

It is not surprising that any talk of revamping the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA for short) brings forth a deluge of protest from jholawala economists and vested interests. The Left loves government spends in the name of the poor, regardless of corruption and unmindful of actual results.

The Modi government’s proposal to change the spending mix on NREGA from 60:40 (for material and wages) to 51:49 and to focus the scheme on the 200 poorest districts (or 2,500 blocks) has brought forth a open letter from 28 “leading” economists to abandon the effort. “Despite numerous hurdles, the NREGA has achieved significant results. At a relatively small cost (currently 0.3 percent of India’s GDP), about 50 million households are getting some employment at NREGA worksites every year. A majority of NREGA workers are women, and close to half are Dalits or Adivasis. A large body of research shows that the NREGA has wide-ranging social benefits, including the creation of productive assets.”

This is, of course, largely bunkum. Nobody needs to deny that some good must have come from spending a massive Rs 2,66,000 crore on NREGA over the last eight years, but even better results could have been achieved by abandoning the charade of providing employment at such huge cost and showering this kind of money from a helicopter in poor areas.

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In fact, the evidence is to the contrary: the money is largely going down the drain.

As economists Jagdish Bhagwati and Arvind Panagariya note in a critique of the scheme in The Times of India, NREGA (after taking corruption and leakages into account) essentially spends as much as Rs 248 in order to deliver a net Rs 50 per person per day. In other words, the scheme is highly inefficient even as a poverty alleviation scheme as it takes nearly Rs 5 to deliver Re 1 worth of benefits to the poor. Would not the poor have benefited more from direct cash transfers of a higher amount without hassles and middlemen?

Quite clearly, NREGA is going the same way as the food subsidy scheme, where too just 12 paise out of every rupee spent reaches the right beneficiary (read more about this here ).

To make matters worse, state governments are now dragging their feet on implementing the scheme, which promises one member of a household 100 days of employment every year, failing which some kind of unemployment allowance is paid by the states. A report in The Indian Express today (24 October) quotes from the minutes of an internal review of the rural development ministry on the scheme as saying that “states expressed their inability to continue the uninterrupted implementation of MGNREG, given the situation of an overall fund shortage.”

It is not as if the scheme, even now, is working to full potential. As against the 100 days of employment promised, it has seldom managed to provide even 50 mandays on an average per household per year. Mostly it has been in the forties. This year, the figure is down to 31.4 mandays per household till mid-October.

What this suggests is that both demand (for work) and supply (by state governments) is weak - raising questions about the viability and utility of the scheme. It is quite possible that demand for NREGA work may not be as robust as presumed, thanks to the general improvement in rural incomes with the steady and increased fund flows to rural areas, which includes investments in infrastructure and consistently rising minimum support prices (MSPs) for foodgrain.

If NREGA had been a big driver of rural incomes, it should have left its impact on food inflation too, but a Reserve Bank of India study found that MSPs and rising rural wages impacted food inflation more than NREGA wages. If the scheme had actually had that big an impact on rural incomes, one would have thought it would have been a major factor in boosting food prices since only the poorest of the poor opt for work under NREGA. And the poor spend more of their incomes on food than the non-poor.

It is quite clear from all this that NREGA is a costly boondoggle which is not achieving even its core objectives of providing enough work to the poor and building durable assets that can increase productivity. If assets had been built, they should have improved rural productivity and impacted food prices downwards. And if only 31 mandays of work are being provided against the mandated 100, it means either the work is not needed or not being provided.

There are thus three possible remedies now.

First, the centre could offer to transfer the funds allocated to NREGA in the budget as a direct grant to states to spend it on any poverty alleviating scheme that works for them. This would be in keeping with Modi’s federalist thinking.

Second, the funds can be converted to direct income support to the poorest of the poor using the Aadhaar-enabled inclusive banking scheme, the Jan Dhan Yojana. Not only will the money go directly to the poor, but their bank accounts would also start getting used.

Third, the best option would be to use the money to build rural infrastructure and assets in the 200 poorest districts where poverty levels are high. This way the projects will generate real jobs at real wages - and not just pointless work and corruption.

Any which way you look at it, NREGA has been a disaster. The NDA has to rework it to get better bang for the buck.