Ashok Gulati

Forget Grains On Subsidy, India’s Poor Can Really Do with the Cash Instead

rot-in-the-fci-godowns

In the column dated July 21, 2016, I had said that the Food Security Act does not really provide “food security” to the citizens of this country. And given that nearly three years have passed after the passage of the Act, it is time that the government took a relook at the functioning of this Act.

In case you haven’t read the piece that appeared on July 21, 2016, I suggest you do that, before getting around to reading this one.

Other than the fact that the Food Security Act does not provide food security, there is also a lot of wastage of rice and wheat that are distributed to the citizens of this country under the Act.

The food grains are distributed using the network of around 5,00,000 fair price shops located all over the country. The trouble is that this network is extremely leaky. Economists Ashok Gulati and Shweta Saini calculate this leakage in a research paper titled Leakages from the Public Distribution System and the Way Forward.

In this research paper Gulati and Saini calculate the total amount leakage through the public distribution system. The union government supplies rice and wheat to states and union territories in order to meet the grain distribution commitments under the Food Security Act. Over and above the normal allocations, ad-hoc allocations are also made.

Further, the state wise monthly per capita consumption of rice and wheat is also available. This is used to calculate the consumption numbers of rice and wheat for every state. As Gulati and Saini point out: “The grains off-taken by each state gives the total grain supply in the year and the consumption figures give how much is received by the targeted consumer. The excess of what is supplied over what is consumed should reflect the extent of leakage of grain from the system. Our calculations show that in 2011-12, 25.9 MMTs or 46.7 per cent of the off-taken grain leaked from the public distribution system.” Hence, a little less than half of the grains distributed through the public distribution system do not reach those who they are meant for.

In fact, in 15 states, the leakage was more than 50 per cent. This included: Delhi (82.6 per cent), Gujarat (72.2 per cent), Haryana (70.3 per cent), West Bengal (69.4 per cent), Bihar (68.7 per cent) and Punjab (60.7 per cent). In fact, in some North Eastern states, like Nagaland and Manipur, the leakages were as high as 95 to 97 per cent. In absolute numbers, Uttar Pradesh comes at the top of the list. This is followed by West Bengal, Bihar, Maharashtra, Rajasthan and Madhya Pradesh.

Other estimates suggest that the leakage of the public distribution system is anywhere between 40 per cent to 54 per cent. Hence, the point is that the leakage of the public distribution system run through the five lakh fair price shops, is excessive. It means that a major portion of the food grains distributed through these shops does not reach the intended beneficiaries.

As the Report of the High Level Committee on Reinventing the Role and Restructuring of Food Corporation of India (better known as the Shanta Kumar committee report) points out: “Leakages don’t happen in a vacuum. There is connivance at several levels, breeding corruption. It is now time to think out of the box and find some alternative policy solutions that can plug such large scale leakages and associated corruption, and that can ensure that benefits reach directly to the neediest.”

And how can this be done? The answer lies in giving cash directly to the beneficiaries of the Food Security Act. There is this great belief among the well-off that giving money directly to the poor will mean that the men will simply drink it away. This argument only sounds true because it plays on a stereotype of the poor being poor because they waste their time drinking.

Nevertheless, as economist Joseph Halon points out: “Poverty is fundamentally about a lack of cash. It’s not about stupidity.” (Source: Rutger Bergman’s Utopia for Realists). Hence, if poor do get money under an unconditional cash transfer scheme, they don’t waste it on alcohol and tobacco. In fact, there is enough research from all over the world that proves that.

As Rutger Bergman writes in Utopia for Realists: “The great thing about money is that people can use it to buy things they need instead of things that self-appointed experts think they need. And, as it happens, there is one category of product which poor people do not spend their free money on, and that’s alcohol and tobacco. In fact, a major study by the World Bank demonstrated that 82% of all researched cases in Africa, Latin America, and Asia, alcohol and tobacco consumption actually declined.”

In fact, such an experiment has happened in Delhi as well, and the results were along similar lines. As Gulati and Saini point out: “It is worth noting that a study by the Government of Delhi and SEWA, under the GNCTD-UNDP project, tested the effects of substituting PDS rations by cash transfers for BPL families in a west Delhi region in the year 2011. It found that the consumption of the studied food items did not fall, and interestingly, the consumption of items like pulses, eggs, fish and meat went up. Contrary to expectations, the alcohol consumption did not increase; rather, the efficiency of PDS shops surely increased!”

The Food Security Act just distributes rice and wheat at subsidised prices. A nutritious meal is about consuming other food items as well. By giving cash directly to families, families can decide what is best for them. In fact, by moving to cash transfers, the country can save close to Rs 33,087 crore, Gulati and Saini calculate, and that is clearly a lot of money. This money can be better utilised elsewhere.

Given this, the Shanta Kumar committee has recommended that cash transfers should be introduced by starting with the “large cities with more than 1 million population; extending it to grain surplus States, and then giving option to deficit States to opt for cash or physical grain distribution.” The Committee has also said that the “cash transfers can be indexed with inflation” and “given to the female head of the family”.

The trouble is that the infrastructure that allows the government to do this (Jan Dhan bank accounts seeded with Aadhar numbers) is not yet ready. The sooner this gets ready, the better it will be for the nation as a whole.

The column originally appeared in Vivek Kaul’s Diary on July 28, 2016

Does the Food Security Act Really Offer Food Security?

food

In late June 2016, the food minister Ram Vilas Paswan, said that by July 2016, the entire country would come under the ambit of the National Food Security Act. As he said: “National Food Security Act is in force in 33 States/UTs, and in states of Tamil Nadu and Nagaland it will be implemented in next month.”

The National Food Security Ordinance (NFSO),8 2013 was promulgated on July 5, 2013. A little over two months later, the National Food Security Act (NFSA) was enacted on September 10, 2013. Given this, it has taken the states nearly three years to implement the Act.

The Food Security Act offered food security by freezing the price of rice, wheat and coarse cereals at the central issue prices of Rs 3, Rs 2 and Re 1, respectively, for a period of three years, up to July 2016. The targeted public distribution system forms the largest component of the Food Security Act.

In fact, there are two types beneficiaries under the targeted public distribution system. There are those who come under the Antyodaya Anna Yojana (AAY) and then there is something termed as priority households. The AAY was launched in December 2000 and it aims to reduce hunger among the poorest of the poor. Priority households on the other hand includes all families which come under the below poverty line. The broader definition of the priority households has been left to the state governments.

As far as entitlements go, every AAY household is entitled to 35 kg of food grains every month. Those coming under priority households are entitled to 5 kg per person of food grains every month. Close to 12.2 crore individuals come under AAY whereas 69.3 crore individuals come under priority households.

Nearly three years after the Food Security Act was passed, a question worth asking is, does it really offer food security to the citizens of this country?

The Food Security Act largely focusses on making food grains available to the citizens of this country at a rock bottom price. In order to support the ambitious coverage of the Act (nearly 81.5 crore individuals or two-thirds of the country’s population as per 2011 Census), the government has to acquire a large amount of rice and wheat through the Food Corporation of India as well as other state procurement agencies.

This has led to the defacto nationalisation of the grain trade. As Shweta Saini and Ashok Gulati write in a working paper titled The National Food Security Act 2013—Challenges, Buffer Stocking and the Way Forward: “Such large-scale public procurement also has the impact of strangling private trade (as has been the case in Punjab, Haryana and now Madhya Pradesh and Chhattisgarh) (CACP, 2014). Of the total market arrivals of wheat and rice in these states, 70-90 per cent is bought by the government, indicating a de‐facto state take‐over of grain trade.”

This has an unintended consequence. Simply stated, the law of unintended consequences refers to a situation where economic decisions have unexpected effects.

In this context Saini and Gulati point out that “the monopolisation of the grain market by the government, where increasingly lower quantities of grains are available in the open market, also leads to the problem of support reversal.”

And what is support reversal? “The average cereal consumption in India is 10.6 kgs per person per month (NSSO, 2011), and NFSA supplies nearly half of it (5 kgs per month per person, except for those under the AAY who have a family entitlement of 35 kgs per month). People go to the open market to buy their remaining cereal requirements. However, with the government mopping up the supply of cereals, the open market is left with less causing an upward stickiness in prices,” write Saini and Gulati.

Even for those coming under AAY, the NFSA doesn’t supply enough food grains. Assuming five people per household, the average individual entitlement comes to 7 kgs per month, which is lower than the average cereal consumption of 10.6 kgs per month.

The point being that even though the idea behind the Food Security Act is to provide food security by selling food grains at a very low price, it makes things a little difficult by pushing up prices of food grains. Further, one needs to take into account the fact that food grains are not the only thing that people are eating in order to survive.

The government offers a minimum support price at which it buys rice and wheat from farmers. This helps on two counts. One is that it encourages farmers to grow rice and wheat, knowing well in advance what price they can sell it at. Further, the government buys rice and wheat to create a buffer stock in order to support the food security programmes, as well as maintain food security of the nation.

But this leads to other issues. As Shweta Saini and Marta Kozicka write in a research paper titled Evolution and Critique of Buffer Stocking Policy of India: “The buffer stocking policy of food grains has become the one tool with the government to fulfil the interlinked objectives of supporting food producers and food consumers, and of ensuring food availability at the national level. Buffer stocking is used to simultaneously tackle the problem of volatility in the price of food grains, provide food security and incentivise high production. Using the same instrument to achieve the objectives of ensuring remunerative price to farmers and providing the food grains so procured to the poor at highly subsidised prices creates conflicts.”

One clear problem is the fact that farmers end overproducing rice and wheat, given that the government buys all the rice and wheat that is brought to it. This discourages farmers from growing fruits, vegetables and dal. As the Economic Survey of 2014-2015 points out: “High MSPs result in farmers over-cultivating rice and wheat, which the Food Corporation of India then purchases and houses at great cost. High MSPs also encourage under-cultivation of non-MSP supported crops. The resultant supply-demand mismatch raises prices of non-MSP supported crops and makes them more volatile. This contributes to food price inflation that disproportionately hurts poor households.”

This essentially means that even though the Food Security Act wants to help people by selling rice and wheat at a low price, it ends up creating a difficult situation because prices of other crops tend to go up, as farmers tend to concentrate on buying rice and wheat. Food inflation in June 2016 was at 7.79 per cent. Within food, vegetables, pulses and sugar, saw an increase in price of 12.72 per cent, 28.28 per cent and 12.98 per cent, respectively. Spices went up by 8.13 per cent.

Hence, the unintended consequence of the Food Security Act is to make things more expensive on the whole. What is the way around this? I shall discuss some solutions in the weeks to come.

The column originally appeared in Vivek Kaul’s Diary on July 21, 2016

Elections with tur dal tadka

Toor_Dal_Tur_dal
Dal prices have been on fire. The bureaucrats and politicians have been caught napping once again. In the recent past, tur dal prices have crossed Rs 200 per kg. The prices of other major pulses have also crossed more than Rs 100 per kg.

The governments (central as well as state governments) have gone on an overdrive and blamed the hoarders for the price rise, as they have often done since the 1960s. A statement released by the ministry of consumer affairs, food and public distribution late last week pointed out that 74,846.359 tonnes of pulses have been seized from hoarders after 6,077 raids.

It is not surprising that the central government wants to push down the price of various pulses in general and tur dal in particular, given the on-going state assembly elections in Bihar. Media reports suggest that the high dal prices have become an election issue in Bihar, with leaders of both the NDA and the Nitish+Lalu+Congress combine accusing each other of not doing enough to control dal prices.

But is hoarding the really the only reason for high prices? The ministry of agriculture publishes a document titled Commodity Profile for Pulses. This document dated March 2015 had clearly pointed out that the total production of various kinds of dal would fall by 6.8% to 18.43 million tonnes in 2014-2015. The production had stood at 19.78 million tonnes in 2013-2014.

The production of tur dal was expected to be at 2.75 million tonnes, a fall of 13.2%.  The production for 2013-2014 had stood at 3.17 million tonnes.

The Commodity Profile for Pulses dated September 2015, revised these numbers. The total production of dal was revised to 17.2 million tonnes, a fall of 13% from 2013-2014. The production of tur dal was revised to 2.78 million tonnes, a fall of 12.3% from 2013-2014.

The point here is that the government knew at the beginning of this financial year that the production of tur dal in particular and total dal production as a whole, had fallen in 2014-2015. It was but logical that hoarders would get into the fray.

This possibility should have been tackled at that point of time. By the time the government woke up to this possibility it was too little and too late. The damage of escalating dal prices had already been done.

Further, imports have been bandied around as a solution to the escalating prices. In a press release dated October 19, 2015, the ministry of consumer prices, food and public distribution stated that the “government would further import 2000 tonnes of Tur dal and 1000 tonnes of Urad dal and tender will be floated by MMTC immediately.”

As mentioned earlier the production of tur dal has fallen from 3.17 million tonnes in 2013-2014 to 2.78 million tonnes in 2014-2015. Also, a poor monsoon this year may also have had an impact on tur production. Tur is mainly grow during the kharif season and a very small portion of the total area under production has access to irrigation. The monsoon this year was at 86% of its long period average.

So what does this mean? The production of tur dal during the course of 2014-2015 was around 0.4 million tonnes lower than 2013-2014. In an article in The Indian Express Professor Ashok Gulati of ICRIER estimates that the yearly consumption of tur dal in India is in the region of 3.3 to 4 million tonnes. Trying to plug this huge gap between falling production and consumption by importing a few thousand tonnes of tur dal is not going to help much.

In fact, the global market for pulses is not very big. In 2014-2015, India imported a total of 4.6 million tonnes of dal, of which 0.58 million tonnes was tur dal. A little over half of India’s tur dal imports came from neighbouring Myanmar and the remaining came from Africa. Also, it is worth mentioning here that India is the biggest producer of tur dal in the world. So imports really cannot help beyond a point.

Further, pulses are an important source of proteins especially for vegetarians. In this scenario as per capita income goes up, the demand for pulses will continue to go up.

As the 2013-2014 annual report of ministry of consumption, food and public distribution points out: “demand for pulses has been increasing steadily mainly due to increase in population and preference for enhanced protein requirements in food.”

A discussion paper titled Taming Food Inflation in India released by the Commission for Agricultural Costs and Prices (CACP) in April 2013 and authored by Ashok Gulati and Shweta Gulati refers to the same reason. As it points out: “[The] study finds that the pressure on prices is more on protein foods (pulses, milk and milk products, eggs, fish and meat) as well as fruits and vegetables, than on cereals and edible oils, especially during 2004-05 to December 2012. This normally happens with rising incomes, when people switch from cereal based diets to more protein based diets.”

This trend of increased consumption of proteins has been around for a while. What all this clearly tells us is that the government failed to see this crisis coming, even though the data as well as the trend suggested it very clearly.

Further, the trend of increased protein consumption will continue, as people earn more and eat better. This can be only solved by producing more pulses within the country.

The government of India actively procures wheat and rice through the Food Corporation of India and other agencies. This creates its own set of problems. As the CACP report points out “Assured procurement gives an incentive for farmers to produce cereals rather than diversify the production-basket.”

The economic incentive the way it is currently structured encourages farmers to produce more of rice and wheat and not other crops. This is something that needs to be set right.

In the short run, the good news is that the area on which pulses have been sown in this kharif season has gone up to 11.6 million hectares from 10.3 million hectares last year.

As far as tur dal is concerned the area under production has gone up by 4% to 3.74 million hectares. While the number is higher in comparison to 2014-2015, it is not as high as earlier years. Between 2010-2011 and 2013-2014, the number varied between 4.42 million hectares and 3.90 million hectares. The yield in 2010-2011 was 655 kg per hectare. This had jumped to 813 kg per hectare in 2013-2014.

With an increase in area under production, prices are likely to fall a bit in the days to come. Nevertheless, if dal prices in general and tur dal prices in particular, need to come down dramatically in the years to come, then the yield as well as area under cultivation need to go up. And this is easier said than done.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in The Asian Age/Deccan Chronicle on October 28, 2015

The Rs 80,000 crore food grain scam no one is talking about

india-wheat-2011-5-5-8-51-9
Vivek Kaul

That the food grains management policy of the Congress led United Progressive Alliance (UPA) government is in a mess, we all know. But the tragedy is that the mess is getting messier.
A new report titled Buffer Stocking Policy in Wake of NFSB (National Food Securities Bill) authored by Ashok Gulati and Surbhi Jain of the Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture, provides more information on the issue.
The Food Corporation of India (FCI) directly and through other state government affiliates procures rice and wheat from farmers at the minimum support price(MSP) set by the government. These food grains are then distributed by the government through the various programmes that it runs, using the public distribution system. As per the current norms FCI buys all the rice and wheat that farmers bring to it, as long as it meets a certain quality.
Over an above the grains required for distribution, the government also maintains a “strategic reserve”. This reserve is kept for bad times like a drought or any other unforeseen shock, when production of food grains tends to drop or their free movement is restricted. In such circumstances, the price of rice and wheat tends to shoot up. The government can utilise these strategic reserves, release them into the open market and ensure that the prices stabilise.
As per the prevailing norms the government needs to maintain a total food grain stock of 31.9 million tonnes as on July 1, of every year. But the actual amount of food grain stock is much higher than this number. As the CACP report points out “The country is currently loaded with large stocks. On July 1, 2012, e.g., it had 80.2 million tonnes, and is likely to have similar or even higher amount this year, despite emerging as the largest exporter of rice (around 10 million tonnes in calendar year 2012) and exporting about 5.6 million tonnes of wheat in FY 2012‐13.”
The situation seems to have continued this year as well. The food grain stock as on April 1, 2013, stood at 59.8 million tonnes against the norm of 21.2 million tonnes, that the government needs to maintain as on April1, of every year. The situation is expected to continue even after the current wheat procurement season ends. The government procures more than 90% of the wheat, during the months of April and May.
After the procurement of wheat ends CACP expects that the total food grain stock will touch around 82.2 million tonnes, as on July 1, 2013. This is way more than the total stock of 31.9 million tonnes that the government needs to maintain as on July 1, of every year.
What is interesting nonetheless is that the wheat procurement has been way less than what was originally projected. “In 2013‐14, the procurement of wheat was initially estimated to be 44 million tonnes by the government after due consultation with state governments, before the procurement season began in March‐April, 2013. Gradually, it was realised by the end of April that it may not touch 44 million tonnes, but stop at around 40 million tonnes. With each week passing in May 2013, the estimate is being reduced and by the middle of May, it was being realised that total procurement of wheat may not cross 32 million tonnes. Such a drop in procurement estimate from 44 million tonnes to 32 million tonnes within less than two months is a cause of concern, and indicates the challenges in honouring the commitments under NFSB,” the report points out.
But even with this lesser procurement the food grain stock is way more than the requirement of 31.9 million tonnes. One explanation for the excess stock is that the government is preparing to introduce the right to food security, which will lead to an increase in the total amount of rice and wheat being distributed by the government. And hence, the greater stock.
Even taking that into account, the total food grain stock is much more than required. As the report points out “Anywhere between 41 million tonnes to say 47 million tonnes, would be a comfortable level of buffer stocks, covering both the operational needs of the NFSB as well as strategic reserves to take care of any drought or other exigency.”
So around 41-47 million tonnes of food grain stock would work well. But as on July 1, 2013, the government of India is likely to have around 82.2 million tonnes of rice and wheat. This means that the government will have 30-40 million tonnes of excess stocks of food grains. This is food grain for which the government has paid the farmer but hasn’t released it into the market, leading to inflation.
As the CACP report points out “The value locked in these “excess stocks”, evaluated at their economic cost, ranges from Rs 70,000 crore to Rs 92,000 crore. This infusion of “excess” money into the economy without corresponding flow of goods is evident in the paradox of rising prices of rice & wheat amidst overflowing stocks in government godowns.”
What is ironical is that the government doesn’t even have enough space to stock all the food grain that it has been buying. The total storage capacity available is around 71.9 million tonnes. Now compare this to the total expected food grain stock of 82.2 million tonnes as on July 1, 2013. What this means is that more than 10 million tonnes of food grain will be rotting out there in the open. And while that happens, food grain prices will continue to go up. Cereal inflation in April 2013 was at 16.65%. In comparison it was at 4.62% in March 2012.
The government has been buying up more and more of rice and wheat being produced in the country over the years. In 2006-2007, the government bought 32% of the total rice paddy produced. In 2011-2012, this had shot up to a massive 54%. In case of wheat, in 2006-2007, the government bought 18% of the total wheat produced. By 2011-2012, this had nearly doubled to 35% This has led to the government stocking up much more food grain than it actually requires.
As a recent report brought out by the Comptroller and the Auditor (CAG) General of India pointed out “The total food grains stock in the Central Pool recorded an increase of 45.8 million tonnes between 2006-07 and 2011-12.”
This has meant that the amount of food grain available in the open market has gone down and leading to higher prices. It has also more or less killed the private trade in the sector. As the CACP report points out “In recent years, the government has procured more than one‐thirds of the total production and more than half of the marketed surplus of rice and wheat. Such large scale public procurement has strangulated the private trade (as has been the case in Punjab, Haryana and now Madhya Pradesh & Chhattisgarh). Of the total market arrivals of wheat and rice in these states, more than 80‐90 percent is bought by the government, indicating a de‐facto state take‐over of grain trade. This reminds one of the failed experiment of wheat trade take‐over in 1973‐74.”
And any monopsony (a market where one buyer faces many sellers) be it the government or the private sector, is not good. This takeover of the grain trade in the country, by the government has come at a huge cost. The government has excess stocks of around 30-40 million tonnes of food grain with an economic cost of Rs 70,000-92,000 crore or lets take the midpoint of around Rs 80,000 crore. More than 10 million tonnes of this grain is rotting in the open i.e. around Rs 20,000 crore of public money gone down the drain. And this is a government which is struggling to control its burgeoning expenditure. India currently has one of the highest fiscal deficits in the world. Fiscal deficit is the difference between what a government earns and what it spends.
As the CACP report points out “It is creditable that India is currently in a state of ‘plenty’ but holding excessive stocks in godowns, which serve no worthwhile purpose, begs the question of economic efficiency in public expenditure. It will be much rational policy choice to liquidate these “excessive” stocks. The money, i.e., around Rs 80,000 crore under the most likely scenario, would certainly come in handy in the current times of high fiscal deficit and the increased availability of wheat and rice in the markets would rein in high food inflation, especially cereal inflation.”
Now that’s something worth thinking about.

The article originally appeared on www.firstpost.com on May 28,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Memo to Sonia: NREGA wasn’t game-changer, growth was


mgnrega-265_1295452615 
Vivek Kaul 
“Perception is reality,” goes the old saying. And the perception among the jhollawallas who belong to the Congress party led United Progressive Alliance (UPA)is that the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has been a swashbuckling success, which has led to a tremendous increase in rural incomes. So free doles have led to higher income and that in turn has created economic growth, is a conclusion that is often drawn.
A new working paper titled Rising Farm Wages in India – The ‘Pull’ and ‘Push’ Factors written by Ashok Gulati, Surbhi Jain and Nidhi Satija of the Commission for Agricultural Costs and Prices(CACP), Ministry of Agriculture, goes a long way in busting this perception.
The real farm wages (i.e. rise in wages adjusted for inflation) grew by 3.7% during the 1990s. The growth fell to 2.1% in 2000s. “So, if real wages had followed the same trend of 1990s in 2000s, the current level of real farm wages would have been higher than what it is today with MGNREGA,” the authors point out.
What is interesting nonetheless is that the data in the 2000s can be divided into two very different parts. Between 2000-01 and 2006-2007, the farm wages declined by 1.8% per year whereas they grew by 6.8% between 2007-2008 and 2011-2012.
On February 2, 2006, MGNREGA was launched in 200 of the most backward districts of the country. The coverage of the scheme was
to all the rural districts from April 1, 2008. The scheme aims at providing at least 100 days of guaranteed employment in a financial year to every household whose adults are willing to do unskilled manual work.
Payments under MGNREGA vary from Rs 120 to Rs 179 per day, depending on the state. “At the national level, with the average nominal wage paid under the scheme increasing from Rs 65 in FY 2006‐07 to Rs 115 in FY 2011‐12… It has set a base price for labour in rural areas, improved the bargaining power of labourers and has led to a widespread increase in the cost of unskilled and temporary labour including agricultural labour,” write the authors of the CACP report.
Guaranteed wages under MGNREGA have increased the wage expectations, although the employment generated under MGNREGA has been less than 10% of the total rural employment in most of the states, during most of the years. And this has led to an increase in farm wages of 6.8% between 2007-2008 and 2011-2012. Or so goes the logic, at least among the jhollawallas. 
But causation is not so easy to establish, even though prima facie that might seem to be the case. There are factors other than MGNREGA at work as well. Take the construction sector for example, which competes with agriculture for labour. The share of workforce that is engaged in construction has increased from 3.1% in 1993-94 to 9.6% in 2009-2010. During the same period the share of work force engaged in Indian agriculture declined from 65% to 53%.
As the CACP authors point out “According to 64thround of National Sample Survey (Migration in India), 2007‐08, nearly 57 per cent of urban migrant households migrated from rural areas and mostly for employment related reasons. For rural males, around 20 percent were employed as casual labour after migration…Thus, construction activity certainly competes for rural labour and would act as a pull on farm wages.”
So taking these arguments into account, the CACP authors constructed a statistical model to test what really impacts farm wages. And this throws up some interesting results. A growth of 10% in construction pushes up the farm wages by 2.8%. A 10% increase in overall economic growth (measured through growth in the Gross Domestic Product) pushes up farm wages by 2.4%.
And what about MGNREGA? “Impact of MGNREGA is also significant with 10 percent increase in employment generated leading to around 0.3 – 0.5% increase in farm wages,” write the authors. While, the impact of MGNREGA on farm wages is significant, it is nowhere near the impact that a rise in real economic activity, which is measured through an increase in construction GDP or overall GDP, has had on farm wages. As the authors point out “The impact of growth variables (GDP (overall) or GDP (agri) or GDP(construction)) is almost 4‐6 times higher than the MGNREGA impact.”
The impact that MGNREGA has varies across states. In states like Andhra Pradesh, Assam, Madhya Pradesh, Punjab, Tamil Nadu and West Bengal the impact of MGNREGA is better in comparison to other states. But even in this case the impact of real economic activity on farm wages is much greater. Also, the impact that MGNREGA is not significant in states like Bihar, Uttar Pradesh and Odisha, which are among the poorest states in India.
So what is the conclusion that one can draw from this? Simply put, real economic activity has a greater impact on real income than free doles given out by the government. And farm wage would have grown at a much faster rate if the government had taken steps to increase real economic activity.
As the authors point out “These results raise a pertinent policy issue: given fiscal constraints and high food inflation, if there was a trade‐off between allocating resources for welfare schemes and increasing investments with a view to raise farm wages, could the money spent on MGNREGA (more than Rs 2 lakh crore) not be better used if it was for investment in say rural‐urban construction, or for overall growth, or for agrigrowth? These investments would have raised the growth rates in these sectors, and thereby ‘pulled’ the real farm wages through a natural process of development, whereby wages increase broadly in line with rising labour productivity…making the whole process much more economically efficient and sustainable.”
There have been reports of gross irregularities in the NREGA scheme. As the authors write “with the current…Minister of Rural Development himself asking for a CAG probeand the former Minister of Rural Development also alleging lack of effective monitoring. This has serious implications on the overall investment/resource allocation strategy.”
But then who is bothered about leakages and sustainable economic growth. It is all about winning the next Lok Sabha election.
Read the full research paper here
The article originally appeared on www.firstpost.com on April 29, 2013
 (Vivek Kaul is a writer. He tweets @kaul_vivek)