Mint Explainer: The big picture behind the MNREGA cut

The budget has cut the outlay for MNREGA, but has sharply raised spending on other rural development schemes like PM Awaas Yojana and Jal Jeevan Mission, indicating that the focus is clearly on building durable rural assets.

This targeted rural capex can not only create jobs but also have a multiplier effect, boosting long-term rural growth. MNREGA has been more a demand-driven employment programme than a tool for creating durable assets, and the scheme needs a course correction. It is not a free cash transfer scheme and has a wide mandate – from building water conservation structures to roads and toilets.

The controversy around MNREGA

Finance minister Nirmala Sitharaman sharply cut the budget for the rural employment scheme in the latest budget. Only about ₹60,000 crore has been allocated to MNREGA this year, about 33% below the revised budget estimates for the scheme in this fiscal. It’s also much lower than the ₹73,000 crore estimated for the scheme in last year’s budget.

The decision has enraged the opposition and social activists, who have accused the government of “killing the law". In fact, the Peoples’ Action for Employment Guarantee and the NREGA Sangharsh Morcha estimated the scheme needs an outlay of ₹2.72 trillion to provide the promised 100-days employment to all households covered under the law this year.

The government’s defence

The government appears to have made a three-pronged argument in its defence. First, MNREGA is a demand-driven employment guarantee scheme and the actual expenditure can be much higher than what has been budgeted. For instance, in FY22, the Centre spent about ₹98,500 crore on MNREGA, while the budgeted amount was ₹73,000 crore. In FY21, the corresponding figures were ₹1.1 trillion and ₹61,500 crore.

Second, the government said it has opened avenues for job creation in rural India through other schemes. The allocation for PM Awaas Yojana-Gramin (PMAY-G) was the highest ever at almost ₹54,500 crore while the outlay for Jal Jeevan Mission (JJM) has gone up from ₹60,000 crore to ₹70,000 crore.

Third, it is argued that many rural workers will return to cities with the pandemic receding, reducing job demand under MNREGA.

The big picture

Beyond the obvious and the stated position of the government, Prime Minister Narendra Modi and his team appear to be making an effort to reorient and overhaul the Centre’s schemes for rural India with an emphasis on durable asset creation.

At the moment, MNREGA follows the 60:40 rule – while 60% of the funds are reserved for wages, another 40% is meant for material to create assets. However, many states, including some of the more developed states in the south, have been spending far more on wages. In some fiscal years, the national average wage component in MNREGA was over 70% and the rest reserved for material.

In a research paper on MNREGA in 2020, The Institute for Social and Economic Change, Bangalore observed: “In this proportion, it may be difficult to make durable and sustainable assets. Moreover, no resource is earmarked for the maintenance of such assets and so, the assets created under MGNREGA are of poor quality and often deteriorated very fast."

In fact, in some years, states like Tamil Nadu and Kerala have spent less than 10% on materials. It’s woefully inadequate, given the sweeping mandate of MNREGA – from water conservation and water harvesting structures to building roads and houses, and land development works.

Modi’s thrust on rural capex

The Centre is likely worried that not enough stress was given to creating durable assets under MNREGA that could have a multiplier effect, creating demand and lifting standards of living over the long term in large swathes of rural India. For instance, building roads deep inside rural India could connect remote areas to bigger towns and cities, giving a fillip to economic activity.

Inadequate stress on asset creation under MNREGA will make it a free cash transfer scheme and that in the long run is unsustainable, even undesirable. A fast-growing economy should be creating enough jobs for all.

It also explains the greater outlays to PMAY-G and the JJM. These schemes are focused on building durable assets in the rural areas – they hope to create jobs in the near term and raise standards of living over the long term. PMAY-G targets 'Housing for All' while JJM hopes to create a robust water supply infrastructure and give every rural household a functional tap connection.

All this fits in well into the Modi government's planned capex thrust. Schemes like PMAY-G and JJM will boost rural capex. A reorientation of the MGNREGA will also spur long-term job creation in rural India.