Do not bet on MNREGA to save the poor

It is now 10 years since the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) was enacted with fanfare to save India’s poor. India has just suffered two droughts in a row, so rural works are important to relieve rural distress. But let me repeat my claim in an exchange I had with economist Jean Dreze in 2009. I said labour-intensive rural works are essential to relieve distress in drought years, but building mud roads and embankments or desilting tanks have limited long-term effects. So, capital-intensive rural investment is the only long-term solution.

Both the African Sahel and Maharashtra suffered several droughts in the 1970s. Amartya Sen and Jean Dreze showed that food availability per person in Maharashtra was half that in the Sahel. Yet rural employment ensured there was no starvation in Maharashtra, while the Sahel had mass starvation despite free kitchens using global food aid. Famine is actually a lack of money, not food, and if rural employment gives the poor money, markets will drive food to where the money is.

Sen and Dreze made me a great supporter of Maharashtra’s Employment Guarantee Scheme (EGS), which guaranteed work for anyone who demanded it. But I became disillusioned in 1996 when I compared poverty declines in various states: Maharashtra’s poverty decline was no faster than the national average. The EGS had been praised lavishly by global experts for good implementation, so its failure to dent poverty was fundamental, not due to the corruption and leakages that affect MNREGA in most states.

In 1994, Narasimha Rao’s Employment Assurance Scheme provided 100 workdays per family in 200 backward districts, exactly what MNREGA did later in 2005. Rural employment rose from 875 million person-days in 1990-91 to 1,232 million in 1995-96. Yet the Congress was thrashed in the 1996 election. Clearly, voters didn’t think it solved poverty.

After 2008, rural wages more than doubled. First, food prices shot up globally and in India too, translating everywhere into rising wages and land prices. Second, galloping GDP growth in India raised living standards, and as people rose from low-income to middle-income levels, they withdrew women from manual work as a status symbol. Between 2004 and 2011, a whopping 40 million women withdrew from rural work, causing a labour shortage and galloping wages.

What impact did MNREGA have in this milieu? Mehtabul Azam of the World Bank took advantage of a natural experiment to estimate this. In 2006, MNREGA applied only to 200 districts. Comparing MNREGA districts with others, Azam found that male wages rose only 1%, and female wages 8%. Female labour participation fell in both types of districts, but less in the MNREGA districts. So, MNREGA had little impact on wages, but a significant impact on male-female wage differentials. Bottomline: MNREGA has gender advantages, but India’s soaring wages after 2008 were driven mainly by high agricultural prices and fast GDP growth which induced female labour shortages, and also induced rural migration to cities, and remittances from the cities back to villages.

N C Saxena, former Planning Commission member, has compared MNREGA with Pradhan Mantri Gram Sadak Yojana (PMGSY), which links villages with expensive asphalt roads, not MNREGA-built mud roads. Uttar Pradesh has 48 million poor people and Bihar has 32 million, but spend only Rs 411 and Rs 165 respectively per poor person through MNREGA. By contrast, richer Kerala and Tamil Nadu spend Rs 9,655 and Rs 5,237 per poor person respectively, although they have respectively only 1.5 million and 5.9 million rural poor. Clearly, well-administered but well-off southern states hog such spending. Saxena wants this to change.

Consider rural roads funded by PMGSY. Bihar outspent Tamil Nadu by Rs 1,992 crore to Rs 21 crore in 2012-13, and by Rs 2,259 crore to Rs 581 crore in 2014-15. Bihar, the original laggard, advanced dramatically in capital-intensive rural spending while lagging in labour-intensive MNREGA spending. Indeed, Bihar in 2014-15 spent twice as much on PMGSY (Rs 2,259 crore) as on MNREGA (Rs 1,073 crore).

Did these priorities help Bihar reduce poverty? Yes, its rural poverty ratio crashed from 55.7% in 2004 to 34.1% in 2011. Bihar’s plan spending shot up from Rs 2,000 crore per year in Lalu Yadav’s time to almost Rs 30,000 crore in 2014-15. This was capital-intensive poverty alleviation, not labour-intensive.

Nitish Kumar’s first term focused on jailing gangsters and massive road building. His second term continued with roads but also tripled power availability to 3,300MW, while telecom penetration exploded. This gave Bihar double-digit GDP growth plus record poverty reduction.

This column started with my recalling an old debate where I argued that MNREGA was a palliative, but sustainable poverty reduction required capital-intensive rural investment. Today, I make bold to claim victory.

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