MGNREGA lesson for universal basic income: Once introduced, there’s no going back

The one irrefutable lesson from MGNREGA, is that once introduced, there will be no going back

Economic Survey makes a spirited pitch for a universal basic income. (PTI)

India is one of the most unequal countries in the world. In terms of Gini coefficient, i.e., measure of income inequity, India ranks a dismal 135 out of 187 countries. This means that most of the prosperity that an increasingly economically liberalised India is seeing, belongs primarily to the top-income percentiles. One in every five Indians lives on less than $2 a day. When India grows by 7%, one slice of the population sees double digit growth, while a big chunk of the populace may be facing negative growth in their income. A basic level of income for everyone seems like common sense in concept.

Economic Survey makes a spirited pitch for a universal basic income. It argues that India spends roughly 5% of its GDP every year on centrally sponsored schemes—some of which are operating pretty much on default; and some dating back to pre-independence (evidently the ‘Livestock Health and Disease Control’ scheme is four years shy of completing a century!). Incidentally, 5% of GDP is greater than our overall fiscal deficit of 3.2%, and almost three times of what the government spends on infrastructure-related expenditure. Also, the poorest of districts are also the ones that suffer from maximum misallocation of funds.

Having a universal basic income means that every citizen, rich or poor, gets a handout from the government—without having to prove that one is adequately poor. Maybe the mind boggling number of farmer suicides in the country could be reduced if the government could be in a position to guarantee basic sustenance for the families.
However, this is not the first time India has played with the idea of providing something close to a universal social security net. The Mahatma Gandhi National Rural Guarantee Act (MGNREGA) that offers a minimum wage and employment; is now around ten-years old. The optics of mass rural employment has ensured that despite all its economic misgivings, the scheme has now survived three governments. Every Budget successive finance ministers make it a point to give themselves a pat on the back for increasing MGNREGA allocations.

Theoretically, the plan was a stroke of genius. On the one hand, it was to tackle the problem of a burgeoning young unskilled population seeking jobs. On the other, labourers were to work on building agricultural infrastructure. This way, the programme were to attack three of India’s most vexing deficits in one fell swoop—the jobs deficit, the social security deficit, and the infrastructure deficit.

However, even the greatest advocates of MGNREGA will probably agree that it has been a mixed success. For a programme being run across the length and breadth of India; there are myriad stories of middlemen siphoning funds; of ponds being dug mindlessly on hill tops; of fabrication of accounts; and untimely payments.
But even then most people argue that this was at least a conscious effort by the government to transfer money from its coffers to the grass roots. Even if a part of it is being siphoned off by middlemen and local power brokers—it still remains a fiscal stimulus. It is quite literally the Keynesian style of government intervention—asking people to dig up holes and fill them up in an effort to keep the economy growing.

In many ways, it chimes closely with the concept of UBI. There is a transfer of money from the government to citizens, without guarantee of any significant increase in productivity.

There is a valid question as to how UBI could affect the broader economy; and probably glancing at the experience of MGNREGA could provide some indication. One, there is likely to be an increase in consumption. Which per-se isn’t really a bad thing—except that Indian consumption generally remains robust even when there is a fall in investment and broader economy slows down.

Unravelling the GDP figures of the last few years reveals a doggedly strong consumption growth that is hauling up the 7% statistic; even while investments are sinking and manufacturing is coughing. The combination of increased consumption and aggregate demand without development of adequate capital assets is recipe for inflationary pressures in India.

MGNREGA wages are also linked to consumption prices—they get revised in tandem with consumer price inflation. It is welcome from the perspective of the recipients because it insures them from having their income eaten up by increase in inflation. But there is a concern that this might in turn affect inflation. A RBI study on food inflation opines otherwise. Anecdotal evidence suggests that land owners and farmers complain of having to face increasing wage costs and shortage of labour. Rural wages has over the past few years accelerated over urban wages, coinciding with the introduction of MGNREGA.

Either ways, like MGNREGA, it is very likely that UBI will also be revised annually with the run-rate of inflation. And there is no guarantee that this wouldn’t distort labour markets and lead to inflationary pressures. Basic jobs will cost more, because the poor will pit their salary offers against the minimum amount that is being guaranteed by the government. And this shock will eventually percolate to the rest of the job bands.

If there is one irrefutable ultimate political economy lesson from MGNREGA, it is that once introduced, there will be no going back. Politics around such a scheme would make it a persistent feature on fiscal balance sheets regardless of whether the economics of it add up.

As celebrated economist Milton Friedman once said, “Nothing is so permanent as a temporary government program!”

The author is deputy head of economics to a foreign mission based in New Delhi. Views are personal

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