National Rural Employment Guarantee Act was enacted by in 2005 in September with a view to provide guaranteed employment for every rural household for 100 days in a year. This was extended to 200 districts in the first phase at an annual cost of Rs. 400 Billion. The Federal government in India achieved a direct connect with the rural mass by letting the local administration, panchayat as they are called, the last leg in the democratic system, to plan and execute work that will help the rural mass to meaningfully create assets in their environment with the resources being provided by the Federal Government. Perhaps for the first time there was an organized effort to canalize the productive capacity of the rural folk to create and nurture useful assets and also address their unemployment and poverty. It is a noble scheme that attempts to address the twin stigmas of the rural economy of not being able to create employment and also reduce the rural poverty. It is natural that the assets created from out of the funds of this scheme will essentially consists of public assets such as watershed development including restoration of water bodies such as canals, water tanks, minor bunds/ dams  besides local forestry, soil erosion structures, roads, flood control measures etc.

The act made it difficult for the intermediaries to divert resources or misuse the allocated funds. Since the schemes under these funds are being loudly proclaimed as constitutional guarantee and state’s contribution to solve the unemployment at the rural places the intermediaries have their role to enable operation of the scheme and not deny the benefits from accruing to the rural folk  by indulging corruption as that will prove counter productive. Since the scheme is based on the payment of minimum wages the rural economy has seen an additional inflationary pressure as the employed youth derived their wages and went about spending the monies earned on the essential. Such increasing money in the hands of many as the scheme disbursed Rs, 41.96 Billion in FY 08 against allocated Rs. 125 Billion.  The scheme has been now been extended to all the districts at an annual outlay of Rs. 160 Billion, although the implementation has not only been tardy but smacks of blatant misuse as the ruling party is out to exploit these as employment doles to needy.

We have now an evaluation of the scheme by Comptroller and Audit general of India besides a number of socially active non-government groups. CAG has found fault with the implementation as most state government did not create an additional resource at the block level to guide and canalize the effort of rural folk and ensure good use of the funds provided. Besides CAG has noticed that  there and  large scale awarding of works under this Act to labor contractors without ensuring that the wages paid by these contractors comply with the minimum wages act. Where the scheme has been well understood by the public the faking of muster roll to claim creation of job was made more difficult. A major loop hole has been that the payments to the beneficiaries were not made through the post office accounts of the persons who were employed under the scheme.

More than 48% of the funds under the scheme were used to create improvement to the water bodies. Such a large scale improvement of the water bodies if well co-coordinated should result in improvement in the rural economy by a good margin. The reviews available suggest that the providing of employment to women under this act seem to have been affected with only 40.85% of the beneficiaries being women. This is lot surprising as the women outnumber men in the rural employability and or employment. The scheme has covered just 6% of the rural households. More than 60% of the resources were spent on the wages.

Does the scheme increase the cost of living in rural .areas?

The GDP is estimated at Rs. 55,000 Billion of which the agriculture is estimated to be Rs. 10, 000 Billion. The allocated fund for the NREGA is Rs. 400 Billion. These monies are minuscule even in the rural economy in which they operate.  Therefore there is no danger of direct of stoking of inflation in the rural areas as the incremental income in the hands of needy is not more than 2-3% of the total demand. Such an incremental demand on essentials can be met by greater saving on the wastages or slightly higher productivity. The scheme is likely to have an indirect effect as the minimum wages get defined n the process and rural employees may demand better wages for comparable work after having been paid higher wages under NREGA. This ripple effect has been reflected in the CPI inflation for agricultural laborers in the original six districts were the scheme was implemented.

How this will affect the investors?

NREGA promises to spend monies based on the wisdom of the local community leader’s monies and not based on the profitability of an enterprise. It is therefore clear that most assets added under the scheme are likely to meet the criteria of revenue generation or productivity. The tax payer’s money will therefore be wasted in number of not so worthwhile initiatives till the experience or expertise in building right type of rural infrastructure assets is developed at the grass root levels. Therefore these monies will create additional pressure on the budget leaving little room to balance the revenues with the expenses. By implementing the Act the government will only increase the rural unemployment or employability as the otherwise employable persons start demanding guaranteed work. The companies such as Hindustan Lever who have a strong rural network of distribution are likely to benefit from the transfer of Rs. 120 Billion from the pockets of tax payers to the rural folk in an attempt to create employment.