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Corporate Jun 16, 2011

NREGA and the law of unintended consequences

By Firstbiz Editors

They say every cloud has a silver lining. But the opposite could also be true: every silver lining may come with a cloud attached.

A case in point is the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA, for short), which has reduced rural poverty and income inequalities, helping the UPA government get itself re-elected with a bigger mandate in 2009.

But every scheme of the magnitude of NREGA is governed by the law of unintended consequences due to its systemic impact. Just as liberal social security nets in the West have created welfare moms, NREGA has accentuated some trends that will have long-term consequences for the Indian economy. Here are some of them.

Just as liberal social security nets in the West have created welfare moms, NREGA has accentuated some trends that will have long-term consequences.Reuters

1. First, poverty reduction has come at the cost of rising food prices as farm wages soar and farmers demand more by way of minimum support prices.

2. Higher wages in rural areas are driving a trend towards greater farm mechanisation. Agro-processing industries like sugar and oilseeds are encouraging farmers to adopt mechanised harvesting techniques.

3. Over time, this may reduce demand for labour in rural areas, making NREGA a permanent feature of social safety nets.

4. Many skilled professions, like rural artisans and handloom weavers, are losing workers to NREGA, leading to loss of skills acquired over several generations.

5. Rising food inflation is causing some of the people recently pulled above the poverty line to be pushed back below it. Firstpost reported recently that 10 million poor people were dragged below the poverty line due to food inflation.

6. Urban wages in sectors like real estate and infrastructure - which depend on migration from rural areas - are rising, raising costs of realty and infrastructure projects.

7. Where NREGA wages are lower than states' own minimum wages, there is political pressure for raising NREGA wages and also minimum wages.

8. What remains to be seen is whether the implementation of NREGA near the border areas of West Bengal, the North-East, Uttar Pradesh and Bihar brings greater migration of Bangladeshis and Nepalese to India. Any bets it won't happen?

by Firstbiz Editors

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