The other side of populism

How a patchily implemented NREGA could end up hurting the Congress.

Published:May 3, 2014 12:20 am
Providing employment to rural unskilled labour is the single most direct and effective way of reducing poverty. Providing employment to rural unskilled labour is the single most direct and effective way of reducing poverty.

By: Dilip Mookherjee

How a patchily implemented NREGA could end up hurting the Congress.

Nine years have passed since the UPA government launched the MGNREGA, the world’s largest workfare programme. The scale of the programme is staggering, providing employment to a third of India’s rural population, at an annual cost of nearly 1 per cent of the GDP. It has formed the backbone of the UPA’s anti-poverty and rural safety net programme, and may represent its most important legacy in the long run.

Views concerning the impact of the MGNREGA are varied, often predictably along partisan lines. Critics argue it is beset with corruption and leakages, populist, politically motivated and manipulated by the UPA for its own electoral advantage. It is said to be responsible for runaway fiscal deficits, inflation and slowdown of growth. Supporters argue that the programme has succeeded in reducing rural poverty, building infrastructure and strengthening local governance. Where does the truth lie?

To answer this, it is essential to review ground-level evidence concerning how the MGNREGA has actually performed. There are numerous studies based on large household surveys, besides a few books, field studies and government reports. Written by academic scholars both in India and abroad, the research papers are free of partisan bias. Though they examine different aspects of the MGNREGA, often with contrasting methodologies, they present a coherent perspective on its main shortcomings and achievements.

With regard to the implementation of mandated provisions, the evidence shows myriad shortcomings and wide variations across states. Less than 50 per cent of beneficiaries were aware of the work-on-demand feature, and just 20 per cent were aware of their unemployment benefit entitlement. Gram sabhas are held infrequently, with low participation rates. There is substantial rationing: in 2009-10, while 25 per cent of rural households were provided work, 19 per cent sought work but did not get employed.

Household surveys and social audits reveal numerous complaints — delayed wage payments, non-issuance of dated receipts, non-payment of the unemployment allowance, and payment of less than full wages. In some states, resistance from local elites has prevented social audits from being carried out. In states such as Andhra Pradesh, where they have been carried out, there is no sign of these complaints abating through successive years. A rising proportion (ranging from 25-50 per cent) are to do with non-payment or delayed payment of wages, besides bribes (14-20 per cent), benami payments (16-19 per cent) and missing records (4-6 per cent). There were fewer complaints regarding material irregularities, but these are intrinsically harder to detect. Follow-up disciplinary action on discovered irregularities were largely lacking, with major or medium actions taken in only 3.4 per cent of the cases. A recent study of eight AP districts estimates that the overall leakage of funds from the programme is at 30 per cent.

Have these implementation problems rendered the scheme ineffective in reducing poverty? Many studies directly examine its effects on the growth of wages, employment, consumption, savings, child labour and schooling. One methodology — difference in differences (DID) — compares the measures of well-being for households before and after coverage, controlling for pre-existing trends and household characteristics. The DID estimates show a rise of approximately 5 per cent in daily wages that can be attributed to the programme, a figure that rises to 9 per cent in the “star” states. Different studies using this methodology find corresponding positive effects on food and non-food consumption, calorie and protein intakes and savings. Rural-urban migration rates have dropped, largely because of a fall in “distress migration”; urban unemployment rates fell by 7 per cent. Child labour fell by approximately 10 per cent, with no corresponding effects on school enrolment, and significant positive effects on grade progression and test scores — larger than the observed effects of conditional cash transfer schemes in Latin America. These benefits were larger for lower castes, illiterates and women.

An alternative methodology — regression discontinuity (RD) — examines differences between districts that just missed belonging to one phase of the rollout and those that just made it. This approach yields more conservative estimates of impacts, with no average impact on wages. Yet even this approach shows strong positive effects — a 50 per cent drop in poverty — for the most vulnerable sections of the population (SCs and STs) during the slack season. The effects are more pronounced in periods of low rainfall. The stronger safety net was accompanied by a move out of employment to self-employment and non-agricultural employment for males, while women’s labour force participation rates rose. Field studies corroborate these statistical results.

There is no comparable evidence concerning the broader macroeconomic effects of the MGNREGA on growth, fiscal deficit or inflation. These are intrinsically harder to estimate. Nevertheless, my own broad assessment is that the MGNREGA had relatively little impact on macro aggregates, compared to other key determinants. The adverse macroeconomic events set in only after 2009-10, by which time the MGNREGA had already been fully implemented. The slowing of growth rates has been caused by many different problems, ranging from “policy paralysis”, environmental clearances, land acquisition, recession in the world economy, appreciation of the real exchange rate to fiscal and monetary contraction since 2010. The rise in inflation is also a post-2010 phenomenon, especially marked in food articles such as milk, edible oils, sugar, fish and vegetables, in which rising rural wages are unlikely to have played an important role. Moreover, the RD-based econometric evidence fails to find positive effects on average rural wages, with most of the positive effect concentrated in the agricultural slack season.

To sum up, the most striking evidence is on the MGNREGA’s success in providing a safety net and reducing poverty for the most vulnerable sections of the rural population. Providing employment to rural unskilled labour is the single most direct and effective way of reducing poverty. Undoubtedly, the price tag is large, at 1 per cent of GDP. But the scheme cuts in half the poverty of the poorest one third of the rural population. With regard to targeting success, it beats the other big-ticket subsidy items in government budgets: food, fertiliser and petroleum subsidies, each of which accounts for 0.8 per cent of the GDP and benefits mainly the middle class rather than the poor. A leakage rate of 30 per cent or less seems a vast improvement on the 70 per cent-plus leakage rates associated with the PDS. The MGNREGA is far from perfect, but considerably more effective than any of these schemes in lowering poverty.

It is no surprise, therefore, that the MGNREGA helped the UPA win for the second time in the 2009 general elections. There is RD-based evidence showing that the Congress reaped electoral benefits from rolling out MGNREGA, and that the budgetary allocations for the programme across districts and blocks have been manipulated in certain states to increase these benefits. But there is also recent evidence that the electoral benefits which arose for the Congress in the early stages of implementation have turned into a liability in later stages. As time goes by, citizen expectations from the scheme have risen, while the problems of implementation have become more evident. Failure to implement the MGNREGA properly is thus likely to be a political liability for the Congress in the medium to long run. Herein lies a cautionary tale for parties in power when they introduce populist schemes: failure to implement them properly will turn out to be a political liability later on.

The writer is director of the Institute for Economic Development and professor of economics, Boston University

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  1. M
    mukesh kale
    May 3, 2014 at 9:48 am
    This is fairly simple and good account. Innovative schemes like MGNREGA and food security are bound have some flaws (some due to "indianness"). The expenses are much much lower in % than many well to do countries make, like US makes 30% each from budget for social security and healthcare - making total 20%of GDP.Things can improve in time with measures , but are not reasons to close them down.