MGNREGA’s easy jobs may have harmed India’s manufacturing sector by luring away skilled factory workers

MGNREGA caused a 10% decrease in the number of permanent workers in factories.
MGNREGA caused a 10% decrease in the number of permanent workers in factories.
Image: Reuters/Desmond Boylan
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A mega job-guarantee program to alleviate massive rural distress may have had an unexpected, deleterious effect: luring India’s skilled labour away from the organised sector.

The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), aimed at the country’s hinterlands, may actually have killed jobs in factories, a recently-published research paper shows. Many permanent workers, that is, those who are directly on a firm’s employee list and reap benefits other than just wages, quit their jobs to work under the scheme, results of the study, released in December 2016, suggest. Lured by the lesser effort involved—MGNREGA jobs like digging pits and filling them don’t need any skills—they leave their factory jobs to work for 100 days under the program and then take up other contractual jobs for the rest of the year.

This, in turn, has reduced labour supply to factories. Factories, in turn, have resorted to more mechanisation, according to the paper authored by Sumit Agarwal, professor of finance at Georgetown University, Shashwat Alok, a professor at the Indian School of Business (ISB), and ISB researchers Yakshup Chopra and Prasanna Tantri.

MGNREGA, introduced by the Manmohan Singh-led government in 2006, was termed by the World Bank as the world’s largest public works programme. It was implemented in response to massive rural distress in Asia’s third-largest economy, though its efficacy was often questioned subsequently.

The program guarantees at least 100 days of wage employment to those adults in rural India who volunteer for unskilled manual work. However, the Act does not mention an expiry date. In 2014, when the Narendra Modi government came to power, it decided to continue the scheme.

The findings

The study, Government Employment Guarantee, Labour Supply and Firms’ Reaction: Evidence from the largest Public Workfare Program in the World, analysed data from the Annual Survey of Industry and MGNREGA for the period between April 1, 2001, and March 31, 2010.

Here are its two main findings:

Drop in the permanent workforce: MGNREGA caused a 10% decrease in the number of permanent workers in factories because many of those who earned the least wages in such a set-up preferred to return to their homes in rural India and work under MGNREGA.

“If work under MGNREGA requires very little effort due to poor monitoring by the government and has added benefits of working very close to home, lower living/incidental expenses, and lower chance of accidents, among others, then even a permanent worker may consider the possibility of working for MGNREGA for 100 days,” the study said.

Increased use of machines: Factories resorted to mechanisation to deal with labour shortage, the study shows. Increased mechanisation significantly increased costs, resulting in lower profits. The researchers found that for the factories thus affected, fixed assets shot up by 11.82% and investment in plant and machinery increased by 23.23% over the period of the study from fiscal 2002 to 2010. Additionally, the expense on rent and leasing of plant and machinery increased by some 25%.

“Increased mechanisation prevents wages from rising despite a labour supply shock. More importantly, these results provide robust evidence against the idea that the decline in (the number of) permanent employees could be driven by a demand shock,” the study said.

To avoid such consequences, the authors say that, apart from fund allocation, the programme design should also be given importance. “From a societal point of view, there is a need to redesign NREGA to encourage skill development and discourage entry of gainfully employed productive workers. Imposing quantity and quality based output targets for the programme could be a first step in this direction,” the researchers wrote in The Economic Times newspaper.