Why NREGA is turning out to be an expensive boondoggle

It was famously said of Mahatma Gandhi that it cost a lot of money to keep him in poverty.

Likewise, for a government that claims to weep tears of blood for those living in penury_,_ the UPA has come up with some inventive ways to squander public money, ostensibly to improve the plight of the poor.

In reality, it has been unmindful of the consequences of the systemic effects of its anti-poverty actions - mainly inflation - and is now paying the price for it. Its flagship Mahatma Gandhi National Rural Employment Guarantee Act (NREGA, for short) is illustrative of this point. It is guzzling cash, and is becoming less and less effective as an anti-poverty vehicle.

The reason is inflation. NREGA has - according to some experts - added to food price inflation, which has pushed more than one crore people back into poverty, according to a recent World Bank study quoted by Firstpost. This is the exact opposite of what the scheme was designed to achieve: lift people out of poverty.

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[caption id=“attachment_28191” align=“alignleft” width=“380” caption=“The World Bank estimates that high food prices in just six months in 2010 have significantly reversed some of the gains from schemes like NREGA. Krishnendu Halder/Reuters”]  [/caption]

The government’s inability to keep inflation down has destroyed the real value of the NREGA scheme, and it has pushed many of the poor back to being poor.

A caveat, though, is in order. Inflation is not caused only by NREGA, for there are several other factors responsible for it, including rising oil and commodity prices, and fiscal profligacy. But NREGA has been a major contributor to rural food inflation, since beneficiaries tend to spend more on food.

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The World Bank estimates that high food prices in just six months in 2010 have significantly reversed some of the gains from schemes like NREGA.

Here’s the math. NREGA provided employment to 2.57 crore people in 2010-11 (based on 257 crore person-days of employment, and 100 days of employment to each person).

But as Firstpost reported recently, as many as one crore people have been pushed below the poverty line as a result of food price inflation in the six months from June to December 2010.

If we consider NREGA as a poverty-reduction scheme - it assures anyone demanding a job 100 person-days of employment at a minimum of Rs 100 a day - its inflationary side effect has had the net effect of pulling people back into poverty.

If we assume that 1.3 crore people were lifted out of poverty during those six months (i.e. half the annual figure), and one crore slipped back to poverty due to inflation, the net poverty reduction effort of NREGA is just 0.3 crore - or 0.6 crore a year. That’s just 60 lakh people lifted out of poverty under NREGA when 2.57 crore people have been given jobs. Less than one in four NREGA beneficiaries is lifted out of poverty because of inflation.

During all of 2010-11, Rs 10,357 was sanctioned under the scheme; that’s an expenditure of about Rs 4,035 per person - assuming each one got 100 days of work.

But since one crore people slipped back into poverty, it means the real cost of lifting someone out of poverty works out to much more: over Rs 18,000 per person per year (total cost divided by net expenditure on people lifted out of poverty). The remaining people were lifted only partially out of poverty.

All this is not to say that the poor should be left to their own devices. But for all their ideological merits, schemes such as these end up driving people further into poverty by stoking food price inflation - and for that reason need to be reconfigured. NREGA possibly cannot work efficiently unless overall agricultural productivity is improved and food prices kept in check.

To tackle the problem of high food inflation, the government is now indexing NREGA wages to prices - in Andhra Pradesh wages per day are already above Rs 120 against the scheme’s Rs 100 guarantee - but this will only make it more unviable as this may stoke further food inflation. The key to success in NREGA lies in supply-side agricultural economics. Right now, it is an expensive boondoggle.