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


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 
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 on April 29, 2013
 (Vivek Kaul is a writer. He tweets @kaul_vivek)

How the govt itself stoked the fires of food inflation

foodVivek Kaul 
Hindi film songs have words of wisdom for almost all facets of life. Even inflation.
As the lines from a song in the 1974 superhit 
Roti, Kapda aur Makan go “Baaki jo bacha mehangai maar gayi(Of whatever was left inflation killed us).”
Inflation or the rise in prices of goods and services has been killing Indians over the last few years. What has hurt the common man even more is food inflation. Food prices have risen at a much faster pace than overall prices.
A discussion paper titled 
Taming Food Inflation in India released by the Commission for Agricultural Costs and Prices(CACP), Ministry of Agriculture, on April 1, 2013, points out to the same. “Food inflation in India has been a major challenge to policy makers, more so during recent years when it has averaged 10% during 2008-09 to December 2012. Given that an average household in India still spends almost half of its expenditure on food, and poor around 60 percent (NSSO, 2011), and that poor cannot easily hedge against inflation, high food inflation inflicts a strong ‘hidden tax’ on the poor…In the last five years, post 2008, food inflation contributed to over 41% to the overall inflation in the country,” write the authors Ashok Gulati and Shweta Saini. Gulati is the Chairman of the Commission and Saini is an independent researcher.
During the period 2008-2009 to December 2012, the wholesale price inflation, a measure of the overall rise in prices, averaged at 7.4%. In the same period the food inflation averaged at 10.13% per year.
So who is responsible for food inflation, which is now close to 11%? The short answer is the government. As Gulati and Saini write “
The Economist in its February 2013 issue highlights that it was the increased borrowings by the Indian government which fuelled inflation…It categorically puts the responsibility on the government for having launched a pre-election spending spree in 2008, which continued even thereafter.”
Gulati and Saini build an econometric model which helps them conclude that “fiscal Deficit, rising farm wages, and transmission of the global food inflation; together they explain 98 percent of the variations in Indian food inflation over the period 1995-96 to December, 2012…These empirical results clearly indicate that it would not be incorrect to blame the ballooning fiscal deficit of the country today to be the prime reason for the stickiness in food inflation.”
Fiscal deficit is the difference between what a government earns and what it spends. In the Indian context, it has been growing in the last few years as the government has been spending substantially more than what it has been earning.
The fiscal deficit of the Indian government in 2007-2008 (the period between April 1, 2007 and March 31, 2008) stood at Rs 1,26,912 crore. This jumped by 230% to Rs 4,18,482 crore, in 2009-2010 (the period between April 1, 2009 and March 31, 2010). This was primarily because the expenditure of the Congress led UPA government went up at a much faster pace than the income.
The government of India had a total expenditure of Rs 7,12,671 crore, during the course of 2007-2008. This grew by nearly 44% to Rs 10,24,487 crore in 2009-2010. The income of the government went up at a substantially slower pace. Between 2007-2008 and 2009-2010, the revenue receipts (the income that the government hopes to earn every year) of the government grew by a minuscule 5.7% to Rs 5,72,811 crore.
And it is this increased expenditure(reflected in the burgeoning fiscal deficit) of the government that has led to inflation. As Gulati and Saini point out “Indian fiscal package largely comprised of boosting consumption through outright doles (like farm loan waivers) or liberal increases in pay to organised workers under Sixth Pay Commission and expanded MGNREGA(Mahatma Gandhi National Rural Employment Guarantee Act expenditures for rural workers. All this resulted in quickly boosting demand.”
So the increased expenditure of the government was on giving out doles rather than building infrastructure.
This meant that the money that landed up in the pockets of citizens was ready to be spent and was spent, sooner rather than later. “But with several supply bottlenecks in place, particularly power, water, roads and railways, etc, very soon, ‘too much money was chasing too few goods’. And no wonder, higher inflation in general and food inflation in particular, was a natural outcome,” write the authors.
So increased expenditure of the government led to increasing demand for goods and services. This increase in demand was primarily responsible for the economy growing by 8.6% in 2009-2010 and 9.3% in 2010-2011(the period between April 1, 2010 and March 31, 2011). But the increase in demand wasn’t met by an increase in supply, simply because India did not have the infrastructure required for increasing the supply of goods and services. And this led to too much money chasing too few goods.
No wonder this sent food prices spiralling. Food prices have continued to rise as the government expenditure has continued to go up. Also food prices have risen at a much faster pace than overall prices. This is primarily because agricultural prices respond much more to an increase in money supply vis a vis manufactured goods where prices tend to be stickier due to some prevalence of long term contracts. As Gulati and Saini put it “In fact, our analysis for the studied period shows that one percent increase in fiscal deficit increases money supply by more than 0.9 percent.”
The other major reason for a rising food prices is the rising cost of food production due to rising farm wages. This pushes inflation at two levels. First is the fact that an increase in farm wages drives up farm costs and that in turn pushes up prices of agricultural products. As the authors point out “During 2007-08 to 2011-12, nominal wages increased at much faster rate, by close to 17.5% per annum…The immediate impact of these increased farm wages is to drive-up the farm costs and thus push-up the farm prices, be it through the channel of MSP(minimum support price) or market forces.”
Rising farm wages also lead to a section of population eating better and which in turn pushes up price of protein food. As Gulati and Saini point out “This 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.”
In the recent past price of cereals like rice and wheat has also gone up substantially. This is primarily because the government is hoarding onto much more rice and wheat than it requires to distribute under its various social programmes.
If food inflation has to come down, the government has to control expenditure. The authors Gulati and Saini suggest several ways of doing it. The government can hope to earn Rs 80,000-100,000 crore if it can get around to selling the excessive grain stocks that it has. Other than help control its fiscal deficit, the government can also hope to control the price of cereals like rice and wheat which have been going up at a very fast rate by increasing their supply in the open market.
As the authors write “By liquidating(i.e selling) excessive grain stocks in the domestic market or through exports, massive savings of non-productive expenditures can be realized. For example, as against a buffer stock norm of 32 million tonnes of grains, India had 80 million tonnes of grains on July 1, 2012, and this may cross 90 million tonnes in July 2013. Even if one wants to keep 40 million tonnes of reserves in July, liquidating the remaining 50 million tonnes can bring approximately Rs 80,000-100,000 crore back to the exchequer. And with this much grain in the market food inflation will certainly come down. Else, the very cost of carrying this “extra” grain stocks alone will be more than Rs 10,000 crore each year, counting only their interest and storage costs.”
Of course this has its own challenges. More than half of this inventory of grain in India is concentrated in the states of Punjab and Haryana. Moving this inventory from Punjab and Haryana to other parts of the country will not be easy, assuming that the government opts to work on this suggestion. At the same time the government will have to do it in a way so as to ensure that the market prices of rice and wheat don’t collapse. And that is easier said than done.
The authors also recommend that the government can cut down on food and fertiliser subsidy by directly distributing it. “By going through cash transfers route (using Aadhar), one can plug in leakages in PDS(public distribution system) which, as per CACP calculations are around 40%, and save on high costs of storage and movement too, saving in all about Rs 40,000 crore on food subsidy bill,” write Gulati and Saini.
Something similar can be done on the fertiliser front as well. “Fertiliser subsidy, if given directly to farmers on per hectare basis (Rs 4000/ha to all small and marginal farmers which account for about 85 percent of farmers; and somewhat less (Rs 3500 and Rs 3000/ha) as one goes to medium and large farmers, and deregulating the fertiliser sector can bring in large savings of about Rs 20,000 crore along with greater efficiency in production and consumption of fertilisers.”
Whether the government takes these recommendations of the Commission for Agricultural Costs and Prices seriously, remains to be seen. Meanwhile here is another brilliant Hindi film song from the 2010 hit 
Peepli Live: “Sakhi saiyan khoobai kaamat hain, mehangai dayan khaye jaat hai(O friend, my beloved earns a lot, but the inflation demon keeps eating us up).”
The article originally appeared on on April 2, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)