Its simple multiplication

Written by Bhupesh Yadav | Updated: Aug 28 2009, 03:09am hrs
The benefits of National Rural Employment Guarantee Act have been widely discussed. Started in 2005-06, this social security scheme will now cover all the districts in India. The critics have of course pointed to how heavily it will cost the exchequer. Either ways, most analysis has only considered the direct impact of NREG; there is a need to quantify the indirect impact also. We need to address the changes in other activities because of the NREG and how those, in turn, affect the wellbeing of people.

One way to do this is to work out the NREGA multiplier, for both output and employment. We define the output multiplier of a sector as the amount by which the total output increases for a unit increase in the output of that sector. For example, if expenditure on the consumption of wheat increases by Rs 1,000 and value of its output multiplier is 1.793, then the increase in all the outputs taken together will be Rs 1,793 (1,000 x 1.793). Similarly, the employment multiplier of a sector gives an estimate of the aggregate direct and indirect employment changes, in person years, resulting from the increase in one unit output of that sector.

IDF selected a village in Gujarat to quantify the indirect impact of NREG using output and employment multipliers. Nana Kotda is a mid-size village, with a population of 1,870. Its located in one of the 200 most backward districts of India.

It was selected for the NREG in February 2006. The village economy of Nana Kotda is predominantly agricultural, with most households engaged in crop cultivation and animal husbandry.

The output multiplier effect works in the following way. One of the major impacts of construction of basic socio-economic infrastructure facilities is crowding in of private investments, as better opportunities become available for starting new enterprises. This tends to increase employment opportunities locally. And since the new employment increases the incomes of households, it leads to an increase in demand for goods produced in the local economy. Thus, the NREG works undertaken in the village have a multiplied impact on the total output, income and employment of the village economy. We treated NREG intervention as an external shock to the village and used a social accounting matrix (SAM) to generate the indirect plus direct impact of the assets.

One of the NREG activities was desilting of six check dams in the village. The total expenditure on this project was Rs 586,131, most of which was labour cost and which directly increased the income of labour households. With 50% of the expenditure being on goods produced in the local economy, the impact of this expenditure on output and household income (by occupation) is given in the table on the left.

Our finding is that in absolute terms, the highest increase in output is in the agriculture sector, followed by the self-employed in non-agriculture sector (fruits and vegetable vendors, carpenters, barber shops, and other services). However, the percentage growth in output is highest for the self-employed in non-agriculture sector. The increase in household income as a result of expenditure by labour households is the most for small and large farmers. It is negligible for service households, which is not surprising as their income is not dependent on the local economy.

The table also shows that the employment growth for the self-employed sector is higher than that for the sector engaged in producing wheat, jowar etc. When there is an increase in the income of the labour households due to NREG wages, they spend more on personal care, other services, fruits and vegetables, education and all other service providing sectors. Due to this spending, output of service sectors rises and leads to more number of person days in the economy.

It needs to be noted that the indirect employment would have been much larger if a large part of the additional income (from NREG) was spent on goods and services produced in the village. However, since the village is less developed, about half of the goods and services consumed in the village come from outside, with the result that the multiplier impact is reduced.

In short, output and income gains clearly seem to place more money in the hands of the farmers, both small and marginal. This leads to an increase in their expenditure on services and non-food products. These results of our study give credence to the assertion that rural demand is picking up in the economy, in contrast to a slack urban demand. In this light, the recent budgets focus on extending NREG to all states, with a Rs 39,100 crore outlay for 2009-10, should be considered in terms of both its direct and indirect impact on the rural economy.

The author is fellow, India Development Foundation