Nearly Rs 40,000 crore, equivalent to the economy of Himachal Pradesh and twice that of Goa would be spent this year on the National Rural Employment Guarantee Scheme (NREGS), now re-christened as the Mahatma Gandhi National Rural Employment Guarantee Scheme. A substantial increase in the budgetary allocation to the scheme in the current financial year was a part of the government’s fiscal stimulus strategy to counter the adverse impact of the global economic crisis. With the global economic crisis and severe drought in many parts of the country adversely affecting economic growth and household consumption in 2009-10, we quantify the likely contribution of the NREGS to the Indian economy.
The scheme that was launched in 200 rural districts in 2006 as the UPA government’s flagship programme for poverty reduction was extended to cover most of rural India in April 2008. As a result of the wider coverage, the government ended up spending nearly Rs 30,000 crore as per the revised estimates, instead of around Rs 16,000 crore which was budgeted for the NREGS for 2008-09. In the current year, in addition to the already inflated expenditure of last year, the NREGS spending was further increased by 30 per cent. Given the vast amount of resources allocated to this scheme, it is vital that its economic impact on consumption and overall economy is analysed, especially this year when the scheme’s primary objective of providing social security has been put to test with severe drought adversely impacting farm income in several parts of the country.
The scheme guarantees a minimum of 100 days of employment as unskilled labour to at least one adult member of a rural household that registers for employment under it, thereby enforcing the right to work. The minimum daily wage under the programme was raised to Rs 100, thereby increasing the daily wages by nearly 50 per cent in certain states such as Uttar Pradesh. In 2008-09, the NREGS generated Rs 10,720 crore of rural income at current prices, which is expected to increase to Rs 27,760 crore this year, assuming the current trend of the share of money spent on wages to total expenditure remains the same.
The exceptional increase in the aggregate rural wage income under the NREGS has helped in keeping rural purchasing power and consumption robust in the face of drought as well as higher food prices. Assuming that the entire income generated under the NREGS is spent by rural households, and after applying suitable consumption deflators, our analysis suggests that the NREGS-generated consumption expenditure amounts to nearly 1.4 per cent of total rural consumption and nearly 1 per cent of total household consumption in India this year, nearly doubling the share since 2007-08.
In terms of the size of the overall Indian economy, our estimates suggest that the NREGS is expected to add roughly 50 basis points to GDP growth this year — a contribution of nearly 7 per cent. Looking at the National Sample Survey Organisation (NSSO) data on the consumption pattern of rural India, it appears that industries related to food and non-food items benefited in real terms by around Rs 7,129 crore and Rs 6,510 crore respectively in 2008-09. For the first half of 2009-10, the same number stood at Rs 5,442 crore and Rs 4,970 crore respectively. This impact of the NREGS-generated income on consumption and the overall economy is a conservative estimate of the impact of the scheme since it does not take into account the multiplier effects of increased rural consumption as well the impact on industries which have benefited due to the NREGS’ administrative expenditure.
The impact on rural employment is even more encouraging. This year, nearly 55 million people would receive employment if the current trend continues — almost thrice the number employed during 2007-08 (19.7 million). The analysis of employment patterns under the scheme using the state-level rural-urban population ratio and the estimated share of state-wise working age population from the census brings to light the extent of rural working-age population employed under the NREGS. In Rajasthan, Karnataka and Tamil Nadu, almost one-third of all rural working-age population is expected to be employed under the scheme in the current year. For Karnataka and Tamil Nadu, the scheme has expanded dramatically from last year. The benefits of the scheme, however, are spatially skewed, with large states like Bihar and Uttar Pradesh — with relatively high rural poverty — lagging behind in their implementation of the scheme.
Finally, the NREGS seems to have worked well as a social security mechanism in the current financial year when drought has plagued a significant part of the country. It is unlikely that the scheme has yet transformed household investment into productive assets and education significantly and, therefore, it may not be contributing effectively to the growth potential of the economy. It is also true that any scheme of this proportion is prone to leakages in terms of corruption and inefficiency. It has also been found that the NREGS creates shortage of farm labour, given the high wages paid under it as compared to the wages of daily farm workers.
Nonetheless, the role played by the NREGS in boosting the overall rural spending and, therefore, growth is crucial. In the wake of a poor monsoon and the adverse impact of the global economic crisis on the economy this year, it is significant. This is not to say that the expenditure on the NREGS has resulted in the best possible use of resources. But in the absence of any social security net, it has at least this year, contributed significantly to rural household income. Given the considerable impact of the scheme, unwinding of the additional spending under the NREGS would be difficult going forward.
Milton Friedman said, “There is nothing so permanent as a temporary government programme.” This might very well be the case in this fiscal stimulus package put into action through the NREGS.
Additional reporting with Parul Bhardwaj & Arvind Kolumum Raja
The authors are at Crisil Centre for Economic Research. Views expressed are personal
