The right questions

Twenty-eight leading and not so leading Indian economists wrote a letter to the prime minister a couple of fortnights ago expressing concern over the possible dilution of the rural employment guarantee scheme, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). It is difficult to disagree with them without sounding like a heartless right-wing monster. Yet some questions need to be asked and I hope that, at least, 28 other economists have similar queries in mind.

I would like to begin with a general question. The ruralemployment guarantee scheme is part of a broader policy approach, redistribution through rights and entitlements(RRE) - to borrow an acronym from the new chief economic advisor to the finance ministry, Arvind Subramanian. Thefood security Act and the minimum support price (MSP) scheme are other elements of this approach. Many of us have persistently opposed this RRE approach arguing that it might bring short-term gains but would stand in the way in the way of long-term growth, fiscal viability and more productive employment. I would not like to revisit the arguments here, but I wonder if what the MGNREGA supporters are offering is a limited endorsement of the employment scheme, or whether their plea or counsel is part of a more general support for the RRE model. If it is, then I have a more serious bone to pick with them.

But let me stick to the MGNREGA and ask my second question. Is the MGNREGA scheme indeed a cheap way to "buy" a lot of welfare as the 28 suggest? The letter points that the MGNREGA involves expenditure of a seemingly minuscule 0.3 per cent of gross domestic product (GDP) but creates jobs for 50 million households. However, 0.3 per cent of GDP might not be that small in budgetary terms. As a percentage of total Budget expenditure, for instance, it works out to 2.5 per cent. If one bears in mind that capital expenditure of the central government last year was just 12 per cent of the total spending of the Centre, the number might not appear that small in relative terms. It is also worth remembering that many of the efforts to check the fiscal deficit in the last years of the United Progressive Alliance (UPA) regime involved a compression of capital expenditure, while protecting the allocations to the RRE schemes.

Question three comes next. Would I be wrong in pointing out that a persistent decoupling of productivity and real wages in a major segment of the economy is bound to lead to large-scale macroeconomic imbalances manifested in things such as persistent inflation. Let me present some simple statistical facts and analysis that I have partly borrowed from a Reserve Bank of India (RBI) working paper by G V Nadhanael (RBI Occasional Papers, Volume 33, 2012) to make my case. First, there was a sharp (five-fold increase) in money wage growth in rural areas from 2007, the year in which large scale implementation of the MGNREGA scheme took place. Is this just coincidence?

Mr Nadhanael's analysis suggests that in the period between 2007 and 2012, wages became a determinant of inflation rather than catching up with inflation. It also set off a wage-price spiral that intensified as the MGNREGA wages began to be indexed to consumer price inflation. But here's the most important bit. Between 2007-08 and 2011-12, rural real wages grew at 6.8 per cent annually. The latest data for growth in productivity for agricultural workers that I could lay my hands on is from the KLEMs (Capital, Labour, Energy and Material Services) project sponsored by the RBI. It turns out to be 2.59 per cent for the period 2000 to 2008. Thus, for parity to hold between wages and productivity, the latter should have doubled in the ensuing period. Even if one assumes some diversification away from farm activities, is it possible to explain a virtual doubling of productivity in the rural economy in the post-2008 period?

Again, as many MGNREGA supporters like to claim, are wages under this scheme far too low to matter in setting market wage rates? The RBI study found that in all the major labour-supplying states (Odisha, Chhattisgarh, Maharashtra, Madhya Pradesh, Bihar and Uttar Pradesh), the wages received under the MGNREGA were significantly higher than the wages received in the labour market. There was the inevitable fall in agricultural employment that followed.

This brings me to a related question. Is it fair to describe the somewhat sharp increases in minimum support prices in the post-2007 period essentially (as some do) as fiscally reckless pandering to certain interest groups? Here are some facts.

Wage costs on average constitute about 50-60 per cent of production costs in farming. Rising wages, thus, automatically pushes up the cost of production. The MSP follows a cost-plus approach and, thus, it is not surprising that with sharply rising wages, the MSP, too, climbed up. Those who like to blame the rise in the MSP for our inflation ills should perhaps take a step back and see exactly what caused a rise in the MSP.

Finally, is it unfair to ask what the impact of rising rural wages has had on manufacturing and construction companies? My sample might be small, but I have heard dozens of companies in labour-intensive manufacturing sectors complain not just about the sharp increase in their wage bill, but the fact that labour was simply not available even at significantly higher wages. By allowing this wage escalation, are we not jettisoning a process (that has been painfully slow in our country) of moving workers from the farm sector to more productive work in industry? Is it incorrect to argue that continuously accelerating rural wages would encourage more contract labour and perpetuate the low employment elasticity of manufacturing in India?

I have nothing against a robust employment scheme that works well in the poorest of the poor districts. But when it comes to supporting a nationwide entitlement programme of this kind, I have my questions.

A response to the 28 economists defending the employment guarantee scheme