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Economy Jan 27, 2012

Did NREGA create more work or leisure? What will Food Bill do?

By R Jagannathan

One of the best arguments against introducing a Food Security Bill is the mixed performance of the Mahatma Gandhi National Rural Employment Guarantee Act (or NREGA).

The logic is simple: without evaluating how money spent on a previous social security scheme is delivering the goods, one should not be pouring even more money into yet another scheme. The sensible things to do would be to study the old one, fix the flaws, and then think of new schemes.

So how has NREGA worked? The answer is mixed. While there is no doubt that it has improved rural incomes - as indicated by the sharp increase in rural wages - in the sixth year of the scheme's existence it appears to have generated as many problems as it had promised to solve.

And the most important piece of dissonance is this: it may be ruining work culture rather than enhancing people's ability to earn more by working more. For a scheme whose purpose is the guarantee of employment, NREGA may be actually generating more leisure that employment.

NREGA may have caused inertia rather than generate new employment: Reuters

At least, that is what V Kumaraswamy, author of an interesting article published in BusinessLine, thinks. An expenditure of Rs 70,000 crore in the initial years of NREGA should have generated additional primary employment of two crore, he says. This is based on the simple idea that when NREGA earners spend their incomes, it creates more rural jobs - the so-called employment multiplier effect.

He writes: "Even if one assumes a ...sober employment multiplier of three, it should have created six crore jobs in rural areas - capable of wiping out unemployment (and associated problems such as hunger and malnutrition). But there is hardly any evidence of such a big-bang impact in the rural areas."

Kumaraswamy suspects that easy money from NREGA has had the opposite effect: of reducing people's need to work. Instead of raising aspirations which drive economic growth, "there is a far-greater-than-expected increase in absenteeism from regular employment - organised and unorganised - and consequent increase in wage levels in traditional vocations. Instead of working additional hours, enhancing incomes and climbing aspirational ladders, the rural recipients seem to have given up their regular occupations and instead seem to be satisfied with their current levels of income and consumption."

These observations, of course, will have to be validated by further research, but prima facie there appears to be some truth to this conclusion since the National Sample Survey Organisation's (NSSO's) employment figures show very low growth in overall jobs created between 2005 and 2010 compared to the previous five-year period.

The Congress believes NREGA was what won it re-election with a better mandate in 2009 - but the scheme may be doing more damage than good.

As Firstpost noted earlier, between 2000 and 2005, the economy created 92.7 million jobs, but in the next five-year period, jobs growth was down to just 2.2 million despite higher economic growth.

What happened?

The key lies in one figure, as indicated in a Crisil analysis of the NSSO data. Crisil says in both five-year periods around 27 million new jobs were created - 27.2 million between 1999-00 and 2004-2005, and 27.7 million in the five years after that.

But during the earlier period, the number of self-employed people rose by 65.5 million people, whereas in the latter period the category of self-employed fell by a dramatic 25.5 million. This is how during 2005-10 we got a net employment growth of just 2.2 million - 27.7 million new jobs, minus 25.5 million decline in self-employment.

The 65.5 million increase in self-employment also tallies with another Kumaraswamy conclusion: that six crore jobs (60 million) should have been created by NREGA. It seems without NREGA, these jobs would have been created as people were forced to find work.

The interesting point is to figure out how much of the decline in self-employment during 2005-10 is the result of people simply giving up former jobs to take up NREGA employment. They would have done this because the latter offered better terms. But the purpose of a social security measure is not to get you off a real job and onto a dole, but to help you when you don't have any other means of earning an income.

Kumaraswamy suspects that the real outcome of NREGA wages - now even higher through inflation indexation and linkage to state minimum wages - is to allow the poor to ease off on their work. In short, NREGA allowed them to work less, and they have probably done so.

The other damage caused is inflation - though indirectly. The link between NREGA and food inflation runs like this: as wages rise, farm labour costs and shortages rise, forcing the government to raise food procurement prices. But since few assets have been created by NREGA to raise agricultural productivity, prices have nowhere to go but up. This does not mean NREGA was the main cause of food inflation, but it contributed.

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So what is the lesson to be learnt from the unintended consequences of NREGA before implementing the Food Security Bill?

The answer depends on what we think the poor will do once they get cheaper food.

The Food Bill intends to give subsidised grain to priority households at Re 1, Rs 2 and Rs 3 per kg of coarse grains, wheat and rice respectively. (Others will get it at half the procurement prices). Since even ration shop prices are much higher than 1-2-3, what will the poor do?

The chances are they will buy the cheap rice (35 kg per household of five per month) and make a profit of Rs 4-7 per kg at least by selling a part of it. Even better, they may merely collect the money from the show owner, who will then make a killing by selling the foodgrains in the open market - as it now happens with grains sold through the public distribution system.

This additional money will be used to buy other kinds of better food - maybe milk, eggs and pulses. It is now well-established that when the poor get more money, they change their eating habits towards protein-based diets, or even junk food.

Will the food bill actual result in a situation where people are eating more? AFP

As authors Abhijit Banerjee and Esther Duflo note in their book Poor Economics, studies in China showed that "households that received subsidies for rice or wheat consumed less of these two items and ate more shrimp, and meat, even though their staples now cost less."

So the economic assumption that if food costs less people will eat more is not true. People will eat the same, but will widen their choices. And when this happens, food inflation will rise. It is no coincidence, that the recent fall in food prices in India excludes milk, pulses, eggs, etc. These continue to be in double-digits.

Kumaraswamy feels that the Food Security Bill might actually end up making agriculture even more unviable by pushing up labour costs even further. If NREGA is any guide, rural workers used higher wages from it to work less.

If cheaper food enables them to work even less, "we could have a steep increase in agrarian costs. Our agriculture...could hardly cope with a crisis on the key input - labour costs."

This is not an argument against feeding the poor. Maybe the answer lies in providing emergency food kitchens in areas that are most in need. But the Food Bill clearly needs a closer look.

One party's election agenda (the Food Security Bill) may be poison for the national economy. At the very least, there is a strong case for going slow on the Food Bill, find out the real impact of NREGA, and then implement a revamped Food Bill in phases so that we don't end up all losers in this game of political giveaways.

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by R Jagannathan

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