India’s rural employment guarantee scheme has become a lifeline for the rural economy once again. Demand for work under the scheme has soared this year even as crop losses and export restrictions have eroded farm earnings. Even during the pandemic, the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) has proved to be one of India’s most effective social safety nets.
Not too long ago, MGNREGS used to be the favourite bugbear of economists and economic commentators. When MGNREGS was first rolled out, they feared that it would distort rural labour markets. By driving up wages artificially, it would stoke the fires of inflation, and compromise India’s macroeconomic stability. Reality has been very different. MGNREGS has been somewhat of an automatic stabiliser, raising consumption levels of rural households facing economic distress. It has barely had any impact on inflation.
A recent research paper by Karthik Muralidharan and Paul Niehaus of the University of California, San Diego, and Sandip Sukhtankar of the University of Virginia helps us understand why many economists misread an important welfare initiative. In partnership with the government of undivided Andhra Pradesh, the trio helped randomise the rollout of a smartcard payment system for MGNREGS payments across 157 sub-districts (or mandals) in the 2010-12 period. The smartcard payment was designed to eliminate delays and leakages. Since the payment system was initially implemented in a randomly selected list of sub-districts, it allowed the researchers to compare economic outcomes in those sub-districts (the “treatment” group) with the rest of the sub-districts (the “control” group).
The researchers found that the payment reform raised household earnings of MGNREGS beneficiaries, boosted local demand, and drove up market wages and non-farm employment without causing inflation. Apart from primary survey data, Muralidharan and his co-authors used a wide range of datasets – including the economic census, livestock census, and secondary survey data – to measure the changes in economic outcomes across the treatment and control groups. The direct impact of MGNREGS on household earnings was only 14%; 86% of the increase came from higher private sector wages and employment, the study published in Econometrica earlier this year showed.
Most economists failed to anticipate MGNREGS’ positive impact because they had an idealised view of the rural labour market. They viewed it through the lens of a perfectly competitive market model, in which a large number of employers interact with a large number of labourers to determine wages. In reality, the rural labour market tends to be dominated by a few large landowners who can easily collude to fix an artificially low wage rate. When the State sets a wage floor (through an effective minimum wage law, or through an employment guarantee programme), it allows labourers to bargain for a better wage. In such a case, higher wages lead to a correction in the labour market, not a distortion.
A labour market distortion tends to shrink demand for labour, as employers find it hard to pay the higher wages. In case of a labour market correction, overall employment rises along with wages, as employers are able to afford the higher wages. This is exactly what happened after the MGNREGS reform was implemented in Andhra Pradesh. Muralidharan and co-authors show wage gains were significantly higher in villages with higher concentration of land holdings. They provide other corroborative evidence to show that rural labour markets were uncompetitive in the first place.
That MGNREGS acted as a corrective force in the rural economy wouldn’t be news to MGNREGS’ backers. When the programme was being rolled out, one of its leading architects, Jean Dreze, had argued that it could break the monopoly power of big landlords in rural labour markets. “Today, rural labourers have no bargaining power,” wrote Dreze in a 2006 article. “The fear of unemployment divides them and puts them at the mercy of private contractors and other exploiters. If rural labourers can get employment on public works at the minimum wage, as a matter of right, they will be able to demand minimum wages from private employers as well.”
To be sure, the large impact of MGNREGS in Andhra Pradesh was a result of effective implementation. In several other large states, MGNREGS implementation has been patchy, limiting its impact. Nonetheless, it has still managed to erode the wage-setting powers of large landowners nationally. This may explain landowners’ fierce opposition to the employment guarantee scheme, Muralidharan and his co-authors suggest. Such opposition may have led rural elites to throw their weight behind the Bharatiya Janata Party (BJP) in the 2014 polls.
Although the BJP’s senior leaders, including Prime Minister Narendra Modi, made some noises against MGNREGS, they did not roll back the programme. In fact, the allocation for the programme was raised during the pandemic. Discontinuing the programme would have risked alienating a significant section of the rural poor. The BJP leadership has wisely eschewed that path.
Unlike several populist schemes that disproportionately benefit rural elites, MGNREGS reaches precisely those who need the State’s help the most. Only those desperate for work queue up for a public works programme. The self-targeting nature of the programme makes it one of the better-designed welfare schemes in the country. It deserves our appreciation and support.
Pramit Bhattacharya is a Chennai-based journalist. The views expressed are personal
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