Wednesday, February 18, 2009

Policy Induced Employment Generation and Sustenance of Household Income: A case of National Rural Employment Guarantee Scheme in India

“Helping the poor manage risks and opportunities”

1. Introduction
India’s National Rural Employment Guarantee Scheme (NREGS also NREGA) a unique rural works program (RWP) supported by legal entitlements operating since three years in all rural parts of India has created conflicting scenarios of hope and despair amongst the development practitioners. Hope, as it has necessary elements to address short term ‘consumption-smoothening’ and then a drive for improving ‘sustainable rural livelihoods’ through spillover effects; thus enabling ‘the poor manage risks and opportunities’. The nregs agency reports that 33.7 million households were provided with 1.43 billion man days of wage employment and distributed close to Rs. 86 billion (about US$ 2 billion) during 2007-8 alone. The absolute large numbers suggests a vibrant and efficient program implementation that matched stated policy and targets. Despair, since nregs suffers from systemic problems and hurdles normally known to plague large scale nation-wide schemes, besides ineffective legal entitlements. Yet reforms are possible through technological support, especially IT-enabled and government’s resolve to overcome hurdles. Devolution of power to third tier of governance at the grassroots-panchayats, enshrined in the 73rd constitutional amendment also provides a ray of hope. Given the expanse and a lack of institutional competence in governing the complex system of nrega implementation, India’s marginalized have to strive hard to seek participation and a say in local level decision making. It is interesting to know if this program has cost effective poverty alleviating characteristics and since it is a gigantic program, one of the largest in the world it can have both local and global ramifications as well.

2. Rationale for Rural Works Program (RWP)
Distribution of national resources amongst citizens takes place through the process of employment generation and opportunities for paid work. A large share of workers in many emerging economies is occupied in traditional rural vocations and crafts that barely register productivity growth. At any point in time many are unemployed or work at less than potential due to systemic and idiosyncratic factors. Generating employment, therefore, to enable vulnerable groups enhance consumption possibilities and sustain income is normally a national priority policy.

Reminiscent of reconstruction of post-depression West, and public works in US during 1970s, the Keynesian and Hicksian prescriptions to full employment are as much relevant contemporary populous South Asia. Infrastructure oriented mass employment programs were pursued as a panacea to achieve consumption smoothening linked welfare effects and enhancing savings led investments furthering economic activities to full employment. Recognizing that contemporary less developed countries possess characteristics different from erstwhile industrialized ones before they developed - a Kuznetenian view; in the real world of imperfections, such as during 1942-45 famine in Bengal, it became clear as to how lack of employment and earning opportunities lead to impoverishment, debilitation and death. Policy induced RWPs therefore were programmatic efforts to generate nonfarm employment to sustain consumption and income especially during conditions of distress caused by drought, natural disasters, market failure in distribution of food items and so on (Sen, 1981). Importance of policy and program action for employment generation to ensure food security amongst poor instead of direct food subsidy strategies in developing economics have been compulsively argued by von Braun (1995). Thus RWPs in countries like India are long term, carry multiple objectives; and a policy response to alleviate economic deprivation would also have other favorable complementarities. For example, the sense of assured wages can reduce precautionary savings leading to improved consumption that can trigger markets even in rural hinterland. Further, somewhat assured employment and associated wage gains may in fact promote agriculture which can be seen not only as risk taking but also risk mitigating strategy, and RWPs have potential to lay successful foundations for growth of a mixed economy as well. Over all mass employment generation strategy do not consider direct food subsidy to vulnerable a prudent strategy, and limitations of direct food subsidy polices are now well known (Pinstrup-Andersen, 1993). It is also pointed out that entitlement based benefits can yield best results when communities are adequately empowered so as to seek participation in programs at volition (Streeten, 2002; Weinberger, 2000).

3. The NREGA - Panacea of a sort
India’s nrega launched in 2005 is seen as a mechanism of income transfer, infrastructure development and promoting rural production and consumption markets - a multifarious strategy (Fig 1). It has found priority policy attention in India’s 11th five year plan (2007-12) under a broader objective of ‘Bharat Nirman’ aiming for resurgence in rural areas. Some consider nrega a natural response to non-inclusive growth that occurred during reforms process of last about two decades. The format of nrega and its nationwide implementation was a result of persistence by civil society and activists which is a common mechanism to influence policy in India. Even IFPRI made a strong policy advice to reorient social safety nets and create more employment in rural India (von Braun et. al. 2005). NREGS is unique, being large in size , intended to cover long periods, disburse huge funds and be dynamically responsive to climatic and rainfall conditions and above all open to any adult intending to work for wages often lower than local causal wages. Since self-targeting is inherent to scheme, besides chronic poverty manifest for example in food inadequacy, it also intends to mitigate idiosyncratic risks and shocks faced by households due to being differently-abled or death of earning member. This scheme can attract attention of unemployed or underemployed because of immediate income (cash) transfer through 100 days assured work is an inbuilt short-term relief objective. Indian policy appears confident that nregs can be important normally, even in the absence of price or income shocks and that it will smoothen seasonal fluctuations in labor demand and, therefore, wage rates in rural areas where rainfall patterns and insufficient irrigation preclude year-round crop cultivation.

Multiple and somewhat optimistic expected implications of NREGA

Protective : assistance ensuring consumption smoothening and immediate welfare

Preventive : insurance facilitating risk taking such as investment in agriculture

Promotive : economic stimulus, through cash accumulation, local production and enhancing markets

- harmonize labor market, promote rural nonfarm employment (RNFE) and equalize wage rates;
- create durable physical assets impacting local eco-system and climate change;
- facilitate human capital formation through skill development; and
- alleviate poverty, effect equity, reduce distress migration and empower women.

The listed issues, however, are yet to be thoroughly investigated in the context of nrega.

The ‘right to work’ is a ‘directive principle’ in Indian Constitution and this was formalized through enactment of the NREGA (2005) . This Scheme draws upon positive experiences of reducing human distress by Maharashtra ‘employment guarantee scheme’ over the past three decades beginning early 1970s (Moore and Jadhav 2006, See Dreze and Sen 1989, Dev, 1995, Dev et al 2004). The Act also aims at ‘generation of productive assets, empowering rural women, reducing rural-urban migration, fostering social equity and environmental protection, among others.’ NREGA if implemented with due earnest has potential not only for reducing vulnerability and relieving chronic income deprivation and improve rural livelihood security but also construction of durable assets and markets in rural areas.

4. What do we know about the Impact of NREGS?
(a) Poverty Impact and Fiscal implications
Before formalizing the Act, government agencies estimated that full coverage of nregs will cost Rs. 400 billion (about US$ 9-10 billion) which was about 1% of GDP. An assessment of impact on poverty at 2005 statutory wage rate by Murgai and Ravallion (2005) suggest that nrega could help reduce rural poverty to 23 per cent during lean season, at annual cost of 1.7 per cent of GDP. Dreze based on simple average minimum wage aggregates of all states estimates the national cost of nrega to be 1.3% of GDP per annum. Similar estimates were made by Shariff (2004) and a case was made that nrega will be sensitive to prevailing minimum wages in respective states.

The allocation and expenditure on nregs during first two years of implementation were low due to staggered implementation; yet for full coverage of 610 districts in 2008-9, only Rs. 160 billion ( 0.37% GDP) were allocated. NREGA expenditure for 2007-8 although 0.23 % of GDP compares well with other national programs namely targeted ‘public distribution system (PDS)’ of food products (0.13% GDP) and ICDS (0.10% GDP) respectively. However, a cost-benefit estimate for erstwhile MEGS compared with PDS suggested a ratio of 21.6 % for the former and meager 11.2% for the latter (Parikh et. al. 2007). While there are substantial improvements lately, the relative efficiency differentials are likely to prevail. The Indian safety net programs appear huge in terms of allocations and coverage but reach a small proportion of poor and only nominal benefits are received by them (see Table 1).

Table 1: Expenditures and coverage of selected safety nets in India
Schemes Actual Expenditure as % of GDP Gross* Transfer per HH
(in Rs.) Households Covered
(in millions) Covered as % of All Relevant HHs
NREGS 0.23 3603 27.3 19.7
TPDS 0.13 604 90.2 47
ICDS 0.10 4384 69.15 50.35
. NREGS: National Rural Guarantee Scheme; TPDS: Targeted Public Distribution Scheme; ICDS: Integrated Child Development Services.
2. Relevant are all rural HHs in case of NREGA and ICDS; and all HHs in case of TPDS
3. State adjusted expenditures of main ICDS and Supplementary nutrition under ICDS programs
4. Amount per child per year. 5. Children * Not adjusted for expenditures on management, leakages and material costs in which case the net amount will be much lower.

Given both low allocation and under-utilization of funds, further financial expansion of nrega may not impact national level fiscal deficits adversely even if no additional tax or levy is imposed; nor does one expect that nregs proceeds would cause inflation in the local economy. An increased cash flow amongst wage workers will pushup local demand and prices, but a simultaneous accelerating effect on local product market associated with broad based income growth will dampen the inflationary impact. However, nregs appear good in reducing risks and vulnerability, but not sufficient to eliminate poverty in India.

(b) Popular Reviews: NREGS still is in formative stage of implementation, therefore, a comprehensive assessment not available. Although previous programs of similar nature were academically studied, the case of nregs is different because of legal empowerment that Act bestows upon those needy, which has prompted an entirely different set of social and political dynamics in rural India. The program is expected to address variable and unpredictable local employment needs by perceiving and assessing needs by community itself - a kind of early warning system of sorts, where the local community decides when to initiate mass employment program. The competing objectives of generating ‘employment’ and creating ‘physical assets / infrastructure’ can lead to mismatch in allocations, and it appears the former take precedence over the other. Balancing objectives of program needs large organizational skills, proximate involvement and commitment of the local level functionaries. The functionality of Indian bureaucracy especially of RWPs always depended upon private contractors, who can engineer shifts in focus, for example, making nrega a normal/regular construction project.

The Comptroller and Auditor General (CAG, 2007) of India made a nationwide assessment of nregs and highlighted serious systemic failures including lack of implementative framework at gram- panchayats. Corruption and dominance of private agents in nregs was also discovered (Commissioners of the Supreme Court of India). For nrega to succeed, the local level functionaries and panchayat must work in tandem, but often overriding influence and interference occur by local contractor who normally is a politician or have political patronage (Fig 2). The local civil society institutions are non-existent and if found unable to penetrate collision between stakeholders and contractors. There is a case to effect systemic change in administrative and implementative structures to ensure that poor get benefits out of nregs (see also Ambasta et. al. 2008).

The panchayts - or micro-local level operative space needs a thorough understanding, which has a large variability across time and space with respect to dynamic relationships amongst the stake holders. Institutional convergence and synergies are essential with other local level actors such as the school system especially the sarva shiksha abhyan (SSA) aimed to improve education infrastructure across rural areas; integrated child development services (ICDS) which is in dire need of space and cooking arrangements; village level potable water and sanitation requirements and so on (refer Fig. 1). The limitation of 60:40 that restrain enhanced material inputs can be addressed through convergence, and mutual supplementation will help overcome respective deficiency of lack of funds for wage payments (Kidwai, 2008).

While nregs suffers from large exclusion errors due to poor coverage, one finds some hope due to greater access that it gives to women, the SCs and the STs (Chandrasekhar and Ghosh, 2009).
A recent field study of vulnerable rural households in seven north Indian states (Shariff, 2008) suggests, that community participation, information sharing, formulation of an opinion of program and social networks stands out as dominating factors that enhances maximization of receipts from nrega. Such attributes are normally prevalent amongst ‘rural middle class’ and therefore poorest of the poor within a micro locality are most likely to face entry barrier to nregs. Mechanisms to overcome such anomalies are available, for example, beneficiary participation and partnerships with local civil society and NGOs are known to have helped in ensuring transparency, equity, timeliness, financial prudence and quality assurance in delivery of public services. Such partnership also strengthens institutional capacity at the grassroots. The future reforms or nregs-course correction must address such anomalies, lest the program is held ransom to middle class values.

(c) Spatial Heterogeneity in Outcomes: Given a vast expanse in which nrega is implemented one expects interstate differentials in implementation, coverage, reach and efficacy partly due to staggered and lagged universalization, administrative bottlenecks unique to each state, differential level and competence of state bureaucracies and so on. A review of studies points to poor implementation; for example, in Jharkhand due to absence of panchayat institutions (Bhatia and Dreze 2006). The problem in Orissa is attributed to systemic (state) bureaucratic failure to put in place transparent implementation of nregs. Large scale leakages and corruption are rampant; all possible due to absence of documentation system amenable for crosschecks for accuracy of record keeping. Some found that professional assessment of nregs in Orissa is impossible due to lack of documentation (Dreze, et al. 2007), and the situation in Bihar is not encouraging either (Pankaj or Sharma 2006).

There are unsatisfactory assessment reports even from Kerala, a state with successful panchayati raj administration; and given high levels of literacy, rights based nregs should worked better. Recent attempt of bank account linked nregs payment could reduce leakages in Kerala (Jacob and Varghese, 2006). The silver lining for the scheme appeared from Rajasthan (Shivakumar 2006, Dreze, et al. 2007) which provides much needed confidence to strive for improvement and continuity of nregs. NREGS in Rajasthan is accessible to the traditionally vulnerable such as agricultural laborers, small and marginal farmers, the Scheduled Tribe and the Scheduled Castes (Jha et al 2008); there are also positive reports of transparent and open audit system for monitoring and on the spot assessment. Rajasthan scheme is also gender sensitive, women constituting over 70% of nregs workers and income thus generated has enabled households in reducing variability of their earnings (Scandizzo, et al., 2007).

5. Discussion and Policy Conclusions
In conclusions it is useful to emphasize, that future of nregs, which is now a legal entitlement for the deprived living in rural areas, is securely tied with functioning of the panchayati raj institutions in India. To some this scheme is a consolidation of democratic process and appears revolutionary! But test of the success of such a large scheme is in its ability to carry vulnerable and the poor on board and keep them there for extended period of time. Further mechanism for an exit from nregs is a useful policy to think about. Due to deepening effects on farming and increase in land productivity the household incomes can rise above poverty line or at a level when reservation-wage will be more than nregs-wage, in which case many marginal and small farmers, may not further nregs work. This aspect is not recognized and no policy guide lines exist as ‘exit strategy’. It is useful to document the processes which provide leads to nregs’s relevance for poverty alleviation through improvement in agriculture.

The nregs is susceptible to both ‘an entry barrier leading to exclusion error’, and large inclusion errors reflecting poor governance. While policy reforms and even public debates emphasize elimination of inclusion errors, what is absolutely not considered or even recognized is that exclusion errors are large and detrimental due to high probability that poorest of the poor are at high risk of such exclusion. Strategies to improve program efficiency must be undertaken jointly and concurrently by strengthening local self governance with clear distinctions made between political, administrative and fiscal decentralization; reforms in nregs is also needed to ensure that excluded are give a passage if necessary through special efforts to get into the folds of scheme. In this regard it is beneficial that political and administrative decentralization precedes the financial one, but it appears that such a stepwise transition has not taken a clear shape in nregs implementation.

Since the breakdown of jajmani system a large number of wage workers and artisan have come out of bondage, but are pushed towards penury due to the breakdown of traditional support systems. Although, wage determination was highly exploitative and imperfect in jajmani system, it provided job stability. NREGS is by far a late response to provide safety net for such vulnerable workforce. While nregs payment is pegged to state minimum wages, what is not well known is its impact on regular manual agricultural wages during the peak and slack agriculture season. This has relevance to food output and larger food security issues of the region and subsequently of country as a whole. There are demands to incorporate amendments in the Act so as to enable extended coverage of the program especially aligning with agricultural season.

In the following are useful policy highlights of the nregs:
• A rural sector reform: NREGA is considered an unprecedented opportunity to build social foundation for safety nets; facilitating inclusive growth and reforming the rural sector in India.

• The Scheme has potential to promote not only private gains at the level of individuals and households; but also regional and national level public good through empowerment of rural labor force, reduction in poverty, positive environmental and climatic outcomes.

• NREGS enables strengthening of panchayat raj institutions through staff appointments, record-keeping and financial management. There are a number of issues relating to integrity and assessing impact that are relevant.

• Democratic process: Community participation, information sharing, formulation of an opinion by rural residents about a scheme and social networks stands out as dominating factors that enhances maximization of receipts from nrega. These mechanisms empower communities and strengthen democratic process and enable the program inclusionary.

• Given the confines of village, striving for convergence through inter-sectoral allocations so as to enhance share of material inputs will yield better outcomes. Such inter and intra-institutional reforms will improve accounting and technical skills of functionaries at the grassroots.

• Technology linked implementation of nregs, for example, wage payment through bank accounts and post office is desirable, but not yet clear if this is sustainable due to high transaction costs.

• Multiple types of convergence and synergies are possible with nregs as below:

Gender Empowering: The nregs program has facilitated women’s participation and cash earning can be complementary to another revolutionary program of micro-credit across India. This synergy will create unprecedented levels of positive outcomes empowering women in India. A highly desirable intra-household dynamics favoring children, women, differently able, the old and infirm can become functional.

Social Capital: A natural linkage of nregs is with access to food. The cash wage payment can be usefully linked with the public distribution system (PDS) of essential commodities. If nregs cash is used to buy food supplied through PDS, the families will net greater (compounded) benefit and consequent nutrition gain could be the most durable developmental outcome. Similarly synergies are possible with mid-day meals scheme in schools benefitting child nutrition and higher enrolment.

Physical Asset Creation: Synergistic linking of nregs with projects working on common property resources such as the micro-water sheds, afforestation, road building and so on could extend benefits to all irrespective of economic standing such as by enhancing farm production and increased access to markets, improving education and health conditions. Extended coverage of nregs to the land less say through home building, managing and improving forests, providing technical training and similar activities may have to be envisioned sooner than later.

• Labor market distortion: NREGS does impact labor markets at least by distorting seasonal rural to rural migration; and also through wage equalization mechanism. Various complexities inherent in labor market distortions should be carefully documented and subject of further research.

• Social conflict: It was intended that nregs wages should not be too high or too low, but such that poor when they intend can seek employment on demand (see also Ravallion 1993). Since this is not the case nregs is set to alter traditional labor and landlord relationships causing local level community conflict which can sabotage the efforts of the entire program. It is necessary to device some sort of ‘cooperative conflict’ resolution mechanism that enables both the relatively better-off and the poor within the community to come together for employment creation and asset formation. In this context, identifying work sites and synergies with other program that produce public good within the local geographic space seems possible. Another mechanism is to enable local level nregs wage fixation aligned with agricultural season. Conflict resolution mechanisms needs to be urgently integrated in to nregs.

• NREGA promotes civil society activity and helps create new leadership at the micro-rural spaces.

• Agricultural Productivity: Broad based rural development is possible as nrega will wield direct and indirect impact on agriculture by increasing land productivity or expanding cropping area, plantations and horticulture. Additionally enhancing and sustaining bio-mass production, grassland and pastures that promote livestock, dairying and related production and markets?

• Climate Change: One third of India’s population lives in an around forest and nrega can be forest friendly though protection and afforestation works. Water moves through forests and connections between forest management and attendant hydrologic effects will have impact on climate change. NREGS has potential to reduce the desertification process in India.

In spite of powerful demands from the monitoring agencies, academics and activists, one finds lack of coordinated government level initiative, innovation and interventions to improve the program. In the end it must be stated that nregs has potential to provide social security to the masses only if its implementation is efficient and synergies are exploited. India should not miss another opportunity to demonstrate that world’s largest democracy also cares for its people especially the deprived and vulnerable, and that it truly is marching ahead to become a welfare state.


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