MGNREGA can revive Rural India
The scheme needs a higher budget. Finance it by rationalising the regressive subsidy regime
Missing in the slew of recent policy measures to arrest the current economic slowdown is any serious policy antidote for the crisis confronting India’s rural economy. What makes this policy silence particularly deafening is the fact that only a few months ago, when elections were round the corner, the rural economy was top priority. In January this year, PM-KISAN was announced and implemented with great gusto. Now, five months after the election, even as the government has belatedly acknowledged the accelerating economic crisis, implementation has slowed down. Disbursements for the third instalment have been significantly lower than the first two instalments which were paid out in the midst of the election campaign.
Perhaps the electoral victory has shifted the government’s political calculus, and emboldened it to focus on other aspects of the economy, specifically the corporate and financial sector in order to boost private investment. But doing this at the cost of focusing on the rural economy is a serious misstep.
For one, current policy measures, including the big ticket corporate tax cuts, are unlikely, in the near term, to address the fall in aggregate demand which lies at the heart of the current slowdown. As economist Himanshu has highlighted, India is witnessing an unprecedented decline in consumption expenditure. Using National Sample Survey Office data, he calculates that consumption expenditure declined at a rate of 4.4% per annum in rural India and 4.8% in urban areas between 2015-16 and 2017-18.
Second, a slew of policy missteps played an important role in accelerating the pace of the consumption slowdown in rural India. These include an inflation targeting monetary policy regime that moved the terms of trade against agriculture, demonetisation and associated measures such as taxing high value cash transactions, and of course, the Goods and Services Tax. Together, these served to reduce liquidity and disrupt established modes of transacting in rural markets.
These policy missteps require specific correctives. A consumption slowdown in a fragile rural economy is a likely indicator of a rise in poverty. Rural India, thus, urgently needs a stimulus (arguably even more than corporate India) to revive consumption demand, in the short-term.
The two most widely debated policy tools through which stimulus could be introduced are an increased Minimum Support Price (MSP) and PM-KISAN. Interestingly, many state governments have recently followed in the Union government’s footsteps by announcing their own versions of farmer income support. These are far more expansive in their budgetary commitments than PM-KISAN.
Both these instruments, however, have limitations. Increasing MSPS risk distorting prices and crop choices that can make longterm agricultural reforms difficult. Moreover, the government is sitting on large, undistributed stockpile of food grains which limits the space for expanded procurement. Income support schemes avoid the distortionary effects of MSPS but confront serious implementation challenges. As the recently released RBI report on state finances 2018-19 pointed out, the success of these schemes is dependent on underlying conditions like completing the digitisation of land records and linking them to bank accounts. This cannot be done overnight, the rushed roll-out of PMKISAN not withstanding. Telangana, the first state to implement and popularise income support to farmers took nearly two years to get its land records database right.
There is, however, a strong case to be made for an improved MGNREGA to serve as the vehicle for delivering a rural stimulus. By design, the MGNREGA is a demand-driven scheme (work is provided to anyone who seeks a job), and therefore avoids targeting problems that confront income support schemes. More important, the programme is designed to incentivise participation of agricultural labour, not just farmers. MGNREGA, thus, has the potential of boosting incomes across all sectors of the rural economy. Finally, contrary to the widely held perception that MGNREGA has merely resulted in “digging holes”, the scheme has played an important role in improving productivity on agricultural land. A majority of work done through MGNREGA is on developing farm land (for instance, constructing irrigation facilities, livestock sheds) owned by small land owners. Improved land productivity can in principle raise farmer incomes and stimulate demand for agricultural labour, thus planting the seeds for a longer term revival.
Leveraging the potential of MGNREGA, however, will require increased budgets, a higher wage floor and mission mode monitoring of implementation. Since 2012-13, MGNREGA budget allocations have consistently fallen short of demand for work, resulting in spending excesses of over ~5000 crores (2017-18 figures). Consequently, wage payments have been delayed (only 32% of wages distributed in the first half of 2017-18 were paid on time) and the overall MGNREGA wage rate has stagnated at levels significantly lower than state minimum wages. Addressing these barriers is critical.
But how will an expanded MGNREGA be financed, especially when government borrowing is at a high of nearly 10% of GDP? There is a case for financing MGNREGA without dipping in to government borrowing and instead rationalising India’s bloated and regressive subsidy regime (fertiliser, water, power) in a phased manner. Crisis can throw up unexpected opportunities. Reforming India’s subsidy regime has been long overdue. Could the current crisis be the opportunity to engineer this structural shift in public expenditure? Of course, more MGNREGA is only one solution to a deeper structural crisis. But if this could result in subsidy reform, the first step toward addressing the long-term challenge will have been taken.