Rural job scheme’s cool, but has its problems

Economics has a strange way of looping back and whacking you on the back of your head. Governments take great pride in formulating grandiose schemes that are purportedly pro-poor but end up hurting the intended beneficiaries.

Sometimes, the intentions are honest but the execution is poor, without much thought given to entire chain of consequences.

With the election bugles having been sounded, speculation is rife about the contents of each party's manifesto. Some of it will be very predictable. For instance, the Congress will definitely try to display two large feathers - one for claiming to have sewn up the nuclear deal with the US and another on the spectacular success of its rural employment programme, the National Rural Employment Guarantee Scheme. Time for a quick look at the last one.

The NREGS was implemented nationally through an Act in 2005 to provide a social safety net for the most vulnerable section of rural society. The scheme's operational guidelines define the NREGS goals: "Through the process of providing employment on works that address causes of chronic poverty such as drought, deforestation and soil erosion, the Act seeks to strengthen the natural resource base of rural livelihood and create durable assets in rural areas. Effectively implemented, NREGA (NREG Act) has the potential to transform the geography of poverty."

The Act also stipulates that every worker be paid minimum wages fixed by the state for agricultural workers. This is where economics starts playing up - unseen and unheard. It works in two ways.

One, where market wages are higher than the minimum wage rate (or, even the wage rate fixed under the particular works programme), the demand for labour for NREGA projects is never met fully. But - and this is the fun part of economics - the converse also holds true.

In many cases, where the state has fixed a high minimum wage rate, which then acts as the floor in that localised market, other agricultural enterprises find it difficult to employ labourers at economical rates.

One can argue that providing minimum wages isn't such a bad thing. For one, it provides an administered floor - beyond which wage rates can't possibly fall - to minimise economic exploitation. But, where political compulsions and one-upmanship lead to rising wage rates, it could even affect the cropping pattern of that state and lead to shortages of certain crops.

A recent report by Swiss bank Credit Suisse predicts that many farmers in western Uttar Pradesh are likely to replace their sugar crop with a rice-wheat crop. One of the reasons responsible for the crop-switch is the rural employment scheme.

The report says: "The government's national rural employment guarantee scheme (NREGA) has resulted in shortage of agricultural labourers in this region. Migration of labour from eastern UP and Bihar has slowed considerably as work is easily available under NREGA. The average daily labour cost has increased from Rs 50-60 per day to Rs 80-100 per day (NREGA daily wage is Rs100 per day in UP). Labour shortage and cost affect cane more than R-W (rice-wheat). For one, cane requires about 75-90 man days of labour per acre per year, while R-W requires about 60 man days per acre per year. Moreover, many jobs in R-W cultivation is readily mechanisable (harvester combines, threshers, etc, readily available for hire in the region), while cane is not amenable to mechanisation (due to lack of or high cost of machinery in the area or due to lack of technology)."

There is another government policy - ostensibly to insulate poor farmers from the vagaries of an unpredictable marketplace - that is also boomeranging on the people it's supposed to protect. Many years ago, the government introduced the minimum support price (MSP) to assure farmers of a reasonable price for their produce.

The government announces a price at the beginning of each crop cycle, thereby providing an artificial and administered floor price below which market prices can't fall. Sometimes, competitive politics forces the government to announce further price increases in mid-season.

Again, nothing arguable with this noble objective. But, as the report from Credit Suisse says: "Over the last four years, the increases in rice (+61%) and wheat procurement prices (+69%) have significantly outpaced the increase in cane prices (+31%)."

The end consequence of this shift in cropping pattern is already showing up in the inflation indices where, despite the downward pressure exerted by petro-products prices, inflationary pressures exist for food items. For instance, the category "sugar, khandsari and gur" has been showing a very high rate of price rise among all the food categories that are included in the inflation index.

But, that is not all. These same high procurement prices also result in food prices rising across all categories. Since the poorest - the NREGA target - have no access to the public distribution system (which is well documented), the high MSP for staple food items leaves daily-wage-earning rural poor with a lower disposable residual income for healthcare, clothing or any other contingency.

So, should NREGA doles be indexed to minimum wages or inflation rate, or even MSP? You can bet your bank passbook that there will be lots of research coming up on this, but what's going to be even more interesting is to see how the NREGA beneficiaries vote.