Sarath Ninan Mathew*

Mahatma Gandhi National Rural Employment Guarantee Scheme (“MGNREGA”): Setting the Context

The unemployment rate in the period 2004-2005 was 2.37%. In the period 2009-2010, when MGNREGA was fully operational, this decreased to 2.06%. In absolute terms, around 1.45 million more people were employed in 2009-2010 in comparison to 2004-2005.[1] Even if we were to attribute all of these job creations to MGNREGA, MGNREGA created only 15 lakh new jobs.  However, as per the electronic muster roll on 5th March, 2017, more than 95 lakh workers were engaged in over 10 lakh worksites under the scheme.[2]

Where did the extra 80 lakh people come from? This alludes to a sectoral shift in the Indian labour market with the onset of MGNREGA. In the period 2004-2005, the workforce engaged in self employment was 259 million people. This changed to 233 million in the period 2009-2010. During the same time period, the workforce engaged in casual labor increased from 130 million to 151 million.[3] Around 26 million people went out of the self employed category and approximately 21 million people were added to the casual labour sector. Not surprisingly, casual labour sector includes the people working under MGNREGA.[4]

What is the impact of this sectoral shift for our economy? In order to fully appreciate the same, a seemingly unrelated point merits our attention. According to the 68th round of the National Sample Survey Organisation, average of the wages earned per day across India by MGNREGA workers is a paltry ₹106.71.[5] MGNREGA is widely criticized for providing wages even lesser than the minimum wages in most states.[6] The 68th Round NSSO report suggests that almost all the other employment opportunities give more income than MGNREGA.[7] In an inflation plagued economy, even self employed people should get an income greater than the abysmally low MGNREGA income.

This is an extremely counter intuitive state of affairs. People are migrating in large numbers towards an employment arena which pays them lesser than alternate available sources of income. The author of this paper identifies three main reasons for this. The first and foremost reason is that MGNREGA provides employment in the close vicinity of one’s residence. This gives immense ease of employment apart from providing statutory job security. This gives the worker the courage to quit his earlier job which required him to travel 50 kilometres everyday to get to his workplace.

Yet another reason for the phenomenon is sociological considerations. Human beings as a social animal crave acceptance and validation in their own sub groups. MGNREGA provides a platform for the entire neighbourhood and the community to work together. A person who shuns this in sight of greener pastures has to face a certain level of social displeasure. Thus, the other jobs now have a disincentive over and above the wages that they give. A person has to balance this disincentive and the increased wages and decide whether or not to opt for MGNREGA or the higher paying alternative.

The final reason for MGNREGA’s popularity despite the decreased wages under it is the decreased amount of labour that you have to provide under MGNREGA. This is also the first and greatest flaw of MGNREGA that this essay identifies. MGNREGA is a legislation designed for providing employment to citizens. Physical asset development is regarded only as a positive externality. Thus, efficiency in work done does not benefit the aims of MGNREGA.

The government’s responsibility under the scheme is to give employment to ‘n’ number of people. There is no incentive on the government to ensure that marginal productivity of labour is optimized in the economic activities undertaken under MGNREGA. There actually exists a disincentive inasmuch as the administrative difficulty in finding new work sites can be avoided if the current work is delayed. The greatest evidence for this is the absence of any kind of supervisor directing the workers.[8]

This is the final reason for increased popularity of MGNREGA among general working population that this paper identifies. MGNREGA allows a person to work very little and still earn a subsistence allowance. A private employer will always go for profit maximization and squeeze out the final drop of marginal productivity out of the labour available to him. MGNREGA, on the other hand provides ‘easy money’.


Consequences of MGNREGA

This scrutiny of the reasons of popularity of MGNREGA will now allow us to appreciate the consequences of the sectoral shift spoken about in the paper earlier, with much greater clarity. The preceding paragraph shows how MGNREGA is a pseudonym for disguised unemployment. This essay identifies two main harms flowing out as consequences of MGNREGA and the shift to MGNREGA from other casual labour and self employment sectors.

The first harm is an immediate decrease in the goods and services produced by the economy. Under the earlier model where people worked for private firms or private persons, the objective was to maximize production of goods and services. For the same, the private employer would adopt various mechanisms. The most widely used mechanism is providing incentives for higher work done and disincentives for lesser work finished. For instance, an employee who does very little work would get fired from a private firm. This is an example of a disincentive. Similarly, an employee who takes extra initiatives to finish work is usually rewarded with bonuses or some other form of incentive. This performance driven private model results in larger quantity of goods and services being produced in the economy which results in the overall development of the economy. As detailed in the earlier section of the paper, this is absent under MGNREGA and this causes the economy to lose out on the goods and services that it had the potential to produce. This harm is even more detrimental in the present Indian economy because of the high core inflation problem. A reduction in the supply of goods and services will further push up prices. This will hit the economically weaker section of the society the most, and ironically enough this is the section that MGNREGA seeks to promote.

The second harm arising from MGNREGA is a long term harm of degenerating human capital in the economy. This is even more dangerous than the first harm outlined in the essay. A well renowned Chinese proverb says ‘Teach a man to fish instead of giving him fish’. Putting MGNREGA in this context, this scheme continuously gives fish to a generation which knew how to fish. If we keep providing fish for a sufficiently long period of time, the only outcome is that the generation forgets how to fish and becomes dependent on a government to provide it fish for perpetuity. Labourers who were actively engaged in various kinds of work previously are now being paid in a model that is just large scale disguised unemployment. In the long run, this causes the people to lose their skill set and this brings about an overall reduction in the quality of human capital in the country. This has huge deleterious effects on the economy.


Conclusion: The way forward

This essay is not an argument against welfare economics. MGNREGA is a very beneficial scheme if it is applied in a targeted manner. Any conclusions drawn from survey reports where a national average of some parameter is considered is always faulty to the extent that this average never captures the true pictures of certain localities which may have statistics completely different from national averages. In other words, the national unemployment rate being less than 2.5% does not rule out a specific village in a remote corner of the country having unemployment rate larger than 50%. In this village, the problem suffered by the economy would be largely an aggregate demand problem. The Keynesian model, which is the theoretical premise of MGNREGA, would directly apply in this scenario. If the government goes ahead and enacts a MGNREGA exclusively for that village, then the economic prosperity in that village would be enormous. People would have disposable income in their hands. This would bring in private investment which would further increase employment opportunities and the entire economy would boom.

While an entire prescription of the administrative actions to be followed for the implementation of the above targeted policy is not possible within the scope of this essay, the author would like to show that such a targeted policy is not impossible or even difficult. Instead of the pan India implementation policy practiced under MGNREGA now, Panchayats and other local administrative bodies should be allowed to apply to state governments for application of MGNREGA in their areas. Depending on the merit of the applications, the rural development wing of the State Government can decide whether or not to implement MGNREGA in these states.

Such a limited application of MGNREGA would also allow payment of Minimum Wages or even higher wages to the workforce. Further, the limited applicability will make it possible for enforcing better utility maximisation in the work done. Even if utility of work is absent and the entire payments are in nature of transfer payments, the situation would be better than status quo as long as the policy is targeted. There are segments of the population which includes physically/mentally challenged people, elderly people who can no longer earn their own sustenance because of age related infirmities. This essay never argues against transfer payment being made targeted to these people. However, a pan India employment Guarantee Act where any person can simply demand to get paid for doing very little or no work induces large amount of lethargy into the society. It degrades human capital and is undesirable.

The reason such a targeted policy is not practiced is purely political. The political mileage gained while guaranteeing employment to the entire citizenry of the country cannot be compared to a move which says we will help out one village which is suffering from an aggregate demand crisis. The need of the hour is a major policy rethinking where we acknowledge the economic costs of MGNREGA and disregard myopic political considerations.

The author is a fourth year student from the West Bengal National University of Juridical Sciences and a serving JILS editor.

[1] Rangarajan, P.I. Kaul, & Seema, Where is the Missing Labour Force?, 46 Economic and Political Weekly 68 (2011), available at, last seen on 08/01/2019, at 69.

[2] At a Glance, The Mahatma Gandhi National Rural Employment Guarantee Act 2005 Ministry of Rural Development Government of India, available at,  last seen on 13/12/2018.

[3] Supra note 1, at 71

[4] Ministry of Statistics and Programme Implementation, Government of India, Employment and Unemployment Situation in India NSS 68th Round, at 14, available at, last seen on 13/02/2018.

[5] Ibid, at 200.

[6] See S. Sivakumar, A political Agenda to Minimize Wages, 45 Economic and Political Weekly 10 (2010), available at, last seen on 10/12/2018.

[7] Supra note 4, at 198-202.

[8] A. Pankhaj & R. Tankha, Empowerment Effects of the NREGS on Women Workers: A Study in Four States, 45 Economic and Political Weekly 55, 55 (2010), available at, last seen on 10/12/2018.

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