Memo to Sonia: NREGA wasn't game-changer, growth was

“Perception is reality,” goes the old saying. And the perception among the jholawallas who belong to the Congress party-led United Progressive Alliance (UPA) is that the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has been a swashbuckling success, which has led to a tremendous increase in rural incomes. So free doles have led to higher incomes and that, in turn, has created economic growth, is a conclusion that is often drawn.

A new working paper titled Rising Farm Wages in India - The ‘Pull’ and ‘Push’ Factors, written by Ashok Gulati, Surbhi Jain and Nidhi Satija of the Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture, goes a long way in busting this perception.

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The simple conclusion, to put it bluntly:growth created more jobs than MGNREGA. The same money invested in the agricultural economy or construction would have improved rural wages even better. Doles are not worth the money.

There is a lesson in this somewhere for the jholawallas of Sonia Gandhi’s National Advisory Council (NAC), who have been at the forefront pushing for greater social spending.

As the CACP study points out, real farm wages (i.e. the rise in wages adjusted for inflation) grew by 3.7 percent during the 1990s. The growth fell to 2.1 percent in 2000s. “So, if real wages had followed the same trend of 1990s in 2000s, the current level of real farm wages would have been higher than what it is today with MGNREGA,” the authors say.

What is interesting nonetheless is that the data in the 2000s can be divided into two very different parts. Between 2000-01 and 2006-2007, farm wages declined by 1.8 percent per year whereas they grew by 6.8 percent between 2007-2008 and 2011-2012.

On 2 February 2006, MGNREGA was launched in 200 of the most backward districts of the country. The coverage of the scheme was increased to all the rural districts from 1 April 2008. The scheme aims at providing at least 100 days of guaranteed employment in a financial year to one person in every household whose adults are willing to do unskilled manual work.

Payments under MGNREGA vary from Rs 120 to Rs 179 per day, depending on the state. “At the national level, with the average nominal wage paid under the scheme increasing from Rs 65 in FY 2006?07 to Rs 115 in FY 2011?12… It has set a base price for labour in rural areas, improved the bargaining power of labourers and has led to a widespread increase in the cost of unskilled and temporary labour, including agricultural labour,” write the authors of the CACP report.

Guaranteed wages under MGNREGA have increased the wage expectations, although the employment generated under MGNREGA has been less than 10 percent of the total rural employment in most of the states during most of the years. And this has led to an increase in farm wages of 6.8 percent between 2007-08 and 2011-12. Or so goes the logic, at least among the jholawallas.

But causation is not so easy to establish, even though prima facie that might seem to be the case. There are factors other than MGNREGA at work as well. Take the construction sector, for example, which competes with agriculture for labour. The share of workforce that is engaged in construction has increased from 3.1 percent in 1993-94 to 9.6 percent in 2009-10. During the same period the share of work force engaged in Indian agriculture declined from 65 percent to 53 percent.

As the CACP authors point out, “According to 64th round of National Sample Survey (Migration in India), 2007?08, nearly 57 percent of urban migrant households migrated from rural areas and mostly for employment-related reasons. For rural males, around 20 percent were employed as casual labour after migration…Thus, construction activity certainly competes for rural labour and would act as a pull on farm wages.”

[caption id=“attachment_737813” align=“alignleft” width=“380”] A growth of 10 percent in construction pushes up farm wages by 2.8 percent. A 10 percent increase in overall economic growth (measured through growth in the Gross Domestic Product) pushes up farm wages by 2.4 percent. Reuters[/caption]

So taking these arguments into account, the CACP authors constructed a statistical model to test what really impacts farm wages. And this throws up some interesting results. A growth of 10 percent in construction pushes up farm wages by 2.8 percent. A 10 percent increase in overall economic growth (measured through growth in the Gross Domestic Product) pushes up farm wages by 2.4 percent.

And what about MGNREGA? “Impact of MGNREGA is also significant with 10 percent increase in employment generated leading to around 0.3 - 0.5 percent increase in farm wages,” write the authors. While, the impact of MGNREGA on farm wages is significant, it is nowhere near the impact that a rise in real economic activity, which is measured through an increase in construction GDP or overall GDP, has had on farm wages. As the authors point out, “The impact of growth variables (GDP (overall) or GDP (agri) or GDP(construction)) is almost 4?6 times higher than the MGNREGA impact.”

The impact that MGNREGA has varies across states. In states like Andhra Pradesh, Assam, Madhya Pradesh, Punjab, Tamil Nadu and West Bengal, the impact of MGNREGA is better in comparison to other states. But even in this case the impact of real economic activity on farm wages is much greater. Also, the impact of MGNREGA is not significant in states like Bihar, Uttar Pradesh and Odisha, which are among the poorest states in India.

So what is the conclusion that one can draw from this? Simply put, real economic activity has a greater impact on real income than free doles given out by the government. And farm wages would have grown at a much faster rate if the government had taken steps to increase real economic activity.

As the authors point out, “These results raise a pertinent policy issue: given fiscal constraints and high food inflation, if there was a trade?off between allocating resources for welfare schemes and increasing investments with a view to raise farm wages, could the money spent on MGNREGA (more than Rs 2 lakh crore) not be better used if it was for investment in say rural?urban construction, or for overall growth, or for agri growth? These investments would have raised the growth rates in these sectors, and thereby ‘pulled’ the real farm wages through a natural process of development, whereby wages increase broadly in line with rising labour productivity…making the whole process much more economically efficient and sustainable.”

There have been reports of gross irregularities in the MGNREGA scheme. As the authors write “with the current…Minister of Rural Development himself asking for a CAG probe and the former Minister of Rural Development also alleging lack of effective monitoring, this has serious implications on the overall investment/resource allocation strategy.”

But then who is bothered about leakages and sustainable economic growth. It is all about winning the next Lok Sabha election.

Read the full working paper here

Vivek Kaul is a writer. He tweets @kaul_vivek