No Proof Required: NREGA does not help the poor

India’s poverty debate needs to focus more on helping the poor than artificially bleeding for their plight

No Proof Required: NREGA does not help the poor
The Labour Ministry is likely to push the Code on Wages and Code on Industrial Relations in the Budget session of Parliament beginning next week. (Reuters)

India has suffered two droughts in a row, and there is obvious concern about rural incomes, especially incomes of the poor. To alleviate poverty, Indian governments have experimented with various schemes, and two that have survived the test of time are the Public Distribution System (PDS) of providing food support to the poor, and the NREGA scheme, meant to provide employment support to the poor (started in 2005).

Many programmes, and institutions, last a long time, but that does not mean they should be persisted with. In numerous posts over the years, I have consistently maintained that out of the four most corrupt institutions in the world, three are in India. My ranking of corrupt institutions is as follows. First place to the world football body, Fifa. Not far behind is the Indian cricket body, BCCI. Third place to PDS and fourth place belongs to NREGA. In terms of corruption per se, both poverty reduction programmes are equally corrupt, but PDS is a much larger corrupt programme and has been there for longer.

It is heartening to note that the first two are now universally recognised as corrupt, and recognised as such by many judicial systems. The other two, while involving unbridled corruption, have escaped censure due to two reasons. First, the programmes are targeted to the poor, and so are “noble” in intent, if not in execution. Second, in a large diverse country like India, there will be some states where corruption is low and scheme performance is high. These leads the defenders to cite the exception as the rule.

From a policy point of view, we should be interested in the efficiency of transferring incomes to the poor. I will discuss aspects of NREGA in this article and am leaving discussion of the PDS to a subsequent article. (See the following paper written for the Brookings Institution for details of the analysis: Food, Hunger and Nutrition in India: A Case of Redistributive Failure,

What is the goal of NREGA? To provide income support to any family that seeks jobs that entail “back-breaking” work like digging ditches, construction of roads, etc. The primary target of this programmeme are very, very, poor families. But how well has it succeeded in this objective? Not very, and indeed just as good (or, more realistically, bad) as the PDS.

How do we know how well NREGA, or for that matter, any poverty alleviation programme is working? Why, by looking at what the government says on that matter. This love and respect, for what the government of the day says, is so sweet only because it is so rare to hear it from the Left intellectuals whose fondness for “in the name of the poor” programmes is only exceeded by the fondness of the Hindu Right to prevent people from making choices about their life and about what they eat (think beef).

The government (ministry of rural development) stated that in the first full year of NREGA, FY10, and a drought year which badly affected poor incomes (like FY16), there were 2.84 billion workdays created. Fortunately, we can cross-check the MRD claims for FY10 via the NSS household survey which explicitly asked households about the number of days of NREGA work the household members obtained. The answer—1.47 billion workdays or about half (52%) the magnitude claimed by the RD ministry.

Two points to note about NREGA performance in FY10. First, 48 % of workdays are ghost days, i.e., unaccounted for by households themselves. In other words, while the government has no doubt paperwork to support their claims of NREGA work done (and monies paid) , the population (middle class, poor or poorest) has no recollection of receiving these payments! In economic parlance, the ghost jobs are called “leakage”. The political scientists call this cost of doing business! The sociologists call it good intentions.

But wait—of the 52 % of workdays that both NSS and MRD agree on actually happened, what percentage of these payments were made to poor households, and poor defined according to the Tendulkar poverty line ? Only 42%. In other words, 58 percent of NREGA payments went to the not-poor. For FY12, we have the results from the University of Maryland-NCAER household survey [IHDS, India Human Development Survey]. The results of this survey indicate that of every 100 NREGA jobs provided, an overwhelming proportion, 75%, went to the not-poor.

Note that NREGA income to the poor may not be sufficient for them to escape poverty. In NSS FY10, NREGA was able to reduce poverty by 2.2 percentage points; in FY12, despite reaching a much lower fraction of the poor (25% versus 42%), the Maryland-NCAER study claims that NREGA was able to reduce poverty by 6.7 percentage points! Or more than three times the achievement level reached just two years earlier.

We obtain, using the same Maryland-NCAER data, that NREGA was able to reduce poverty by only 1.1 percentage points in FY12. One explanation for the large difference in the two estimates of poverty reduction for the same data and the same year is as follows. The poverty reduction effect can be estimated in one of two ways. Either the overall impact of the programme is estimated (i.e., how much did expenditures reduce overall poverty; this is our method) or estimate the poverty reduction of the programme only among those who participate in the programme (as apparently done by the Maryland-NCAER study). The 6.7 percentage point reduction is for those households that had some positive NREGA payment and were poor to begin with. Such households comprised only 17% of rural households and for these households, poverty was reduced by 6.7 percentage points. Hence, for all rural households poverty would have been reduced by (.067*17) or 1.1 percentage point—exactly what we have stated above.

Summarising, the efficacy or poverty reduction capabilities of NREGA, across two different surveys and two different years, is very poor (and hence very corrupt). NREGA payments to the deserving poor allowed 16.3 million individuals to become non-poor in FY10. The cost of this policy: R24,000 to make one individual not poor for one year. The FY12 estimate is almost double that of FY10—approximately R40,500. Indeed, this level is the highest recorded for any poverty alleviation programme in India (PDS or NREGA). The average of the two estimates to remove one person from Tendulkar poverty, defined as approximately R10,000 a year, is R32,500 a year.

The average poverty gap (difference between average incomes of the poor and the poverty line) is R1,700 a year. The government spends, via NREGA alone, R32,500 a year—(32,500/1,700) or19 times what is needed to make an average poor person, non-poor. Stated differently, but equivalently, with perfect targeting (275 million poor receive R1700 each), the government needs to spend R47,000 crore to eliminate Tendulkar poverty on an annual basis—or about what it spends on NREGA alone.

So, the next time you defend NREGA, just think of how many poor people can be helped, and by how much, by junking NREGA. Instead, why not provide cash transfers to all the poor rather than just the odd poor person that falls into the well-intentioned NREGA net?

The author is contributing editor, The Financial Express, and senior India analyst, The Observatory Group, a New York-based macro policy advisory group

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