Modi U-turn for the better: Changing NREGA would have been a mistake

Not all U-turns are bad. Some are good, like the one by the NDA government on the MNREGA, also called NREGA .

For the uninitiated, the new NDA government had about three months back proposed to make changes to the pro-poor scheme launched by the erstwhile United Progressive Alliance. According to media reports that cited a circular, the proposal was to amend the NREG Act by restricting the area of work and altering the labour-material cost ratio.

[caption id=“attachment_110281” align=“alignleft” width=“380”]  PTI image.[/caption]

The plan was to limit the scheme that guarantees 100 days of employment to the rural poor to just 2,500 blocks as against 6,500 blocks. Further the wage-material cost ratio was to be altered in favour of material - from 60:40 to 51:49. What this means is that until now 60 percent of the expenditure was spent as wages and 40 percent as cost of material.

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As per the proposal, the spending on wages would drop toalmost the same as that spent on material, which would mean a reduction in the funds set aside for wages. Moreover, there were also plans to curtail the central government’s fund disbursal to states, with Karnataka Chief Minister Siddaramaiah even seeing theallocation to the state being halved.

These were the proposals made by former Rural Development Minister Nitin Gadkari. Now new minister Birender Singh has told Rajya Sabha that there will not be any change in the scheme.

“There is no ambiguity about the government’s intention. The scheme will continue in all the 6,500 blocks,” Singh said, allaying all apprehensions that the new government may be killing the scheme.

According to a PTI report, he also said all necessary funds have been released and assured the 60:40 ratio on labour and material would not be altered.

What prompted this U-turn from the proposed amendments is a hue and cry raised by a section of economists, rights activists and other political parties. According to a Firstpost report , the economists, including Jayati Ghosh of JNU and Anirban Kar of Delhi School of Economics, had shot off a letter to Prime Minister Narendra Modi urging him not to make changes to the scheme that provides livelihood for about 50 million households.

Whatever the reason, the change in stance is welcome because going ahead with the decision to alter the scheme would have been a flawed one given the signs of weakness in India’s rural economy.

Yes, the rural economy is faltering. For evidence, one only needs to read the RBI’s monetary policy statement closely.

“Domestic activity weakened in Q2 of 2014-15, and activity is likely to be muted in Q3 also because of a moderate kharif harvest. The deficiency in the north-east monsoon rainfall has constrained the pace of rabi sowing, except in the southern States. Despite reasonable levels of water storage in major reservoirs, the rabi crop is unlikely to compensate for the decline in kharif production earlier in the year and consequently, agricultural growth in 2014-15 is likely to be muted. This, along with a slowdown in rural wage growth, is weighing on rural consumption demand,” the RBI has said.

The fact is already there has been a reduction in households providing employment under the scheme and also the wage expenditure. According to the NREGA website, households provided employment under the scheme has been on the decline from August. While in August the decline was a modest 14 percent on year, in November the fall has been a sharper 70 percent. So also the wage spend. While until September the salary expenditure was higher than than the levels from a year ago, from October onwards is has more than halved. The slowdown in rural wage growth, cited by the RBI, could also be attributed to this.

Viewed in this backdrop, the government’s U-turn on the MNREGA is good for two reasons.

For one, a slowdown is rural wage growth and consumption demand also has repercussions for a section of the corporates as itwill impact the sales of non-agricultural goods. A tweaking of the scheme and lowering of wages would only have crippled rural demand further. It hasto be remembered that the rise in rural income and wages due to the job scheme had boosted corporates’ sales over the last few years. So a reversal in the wage growth would also have a negative impact. The U-turn may have averted this, at least to a small extent.

Secondly, the time is not right to make alterations to the scheme. The logic is pretty similar to the one applied to fuel decontrol. Those who are in favour of a full fuel decontrol now argue that the international oil prices are low and if we decontrol petrol and diesel now, the government will not have to suffer a backlash as the local price will also be subdued. Similarly, any alteration in the wage component under the job scheme should be brought about when the rural incomes are robust, which will act as a buffer. Reducing the wage component when the rural incomes are already trending down due to a truant monsoon will serve as a double whammy for the rural poor. So, definitely, this is not the time to make any changes to the wage portion of the scheme.

Moreover it could just be a myth that the job scheme had resulted in a spiral of wage inflation in the rural jobs sector. RBI governor Raghuram Rajan had once said that NREGA spiked rural wages only 10 percent; the rest was from minimum support prices.

“On the NREGA, there is clearly a lot of sense that this has increased rural wages tremendously. I would argue that clean, trustworthy studies say that the effect was may be 10 percent,” he had saidat an event in Mumbai .

The comment is significant as it is coming from Rajan, who is an advocate of fiscal prudence.

The U-turn gives the NDA government a chance to clean up the scheme which was much diluted and squandered by the UPA itself. The focus should now be on plugging the leakages, curbing corruption, and implementing the scheme in its letter and spirit.

As Rajan said the view that the potential worker should be starved to make him come to work is an old one.

“What you want is a healthy, well educated, skilled worker today. We need to ensure that people have the ability to build up on those capabilities,” he said.

If implemented properly, the NREGA indeed has the potential to create such a work force.