In the supplement of yesterday’s The New Indian Express (one of the six articles is here: http://epaper.expressbuzz.com/NE/NE/2009/07/12/ArticleHtmls/12_07_2009_412_002.shtml?Mode=1), it was argued about how the combination of NREGS and cheap rice (most states provide or promise to provide 25 kg of rice per month per poor family at Rs. 2 per kg) is destroying the rural economy.
One day of work under the NREGS gives a person Rs. 100. Half of that will go into buying rice for his family for the ENTIRE MONTH. Extending this argument, twelve days of work under the NREGS will feed his family for the whole year. Given that the staple is taken care of,, there is little incentive for the villager to work to earn more. And so there is a severe shortage of farm labourers, other rural workers, etc.
When the NREGS came about, some people applauded it saying that it would ensure that minimum wage laws would now be met. Given that people were now assured of a certain sum (say Rs. 100 per day) for doing meaningless stuff like digging and filling holes, they would go to do other harder and more meaningful work only if they were paid more (and you need to take into account that “real work” takes more discipline, hard work, etc. than it takes to wrok for a welfare program – so the NREGS actually pushed up the minimum wage for farm labour to much higher than Rs. 100).
Now, with various states coming up with cheap rice schemes, the whole thing has gone topsy turvy. Given the subsidized rice, it is now possible for the worker to earn enough for his staple food by just doing a few days of work under the NREGS! The only need for him to work elsewhere, and possibly harder, is to pay for his “luxuries” (considering the price of subsidized rice, requirements and NREGS pay, it can be shown that 100 days of NREGS work can pay for all the essentials).
Given that the essentials are taken care of by the combination of NREGS and cheap rice, the only reason that the worker will need to do actual (i.e. non-NREGS) is to help him save, or for “luxuries”. Yes, some workers will have special needs for money at different points of time because of which they will take on the extra work, but if you aggregate the supply of work, you will realize that the ‘hurdle daily rate’ for the worker to accept “real work” becomes really high.
Since the worker doesn’t absolutely need the money, he can now become the price-setter in the job market rather than being a price-taker. So what this effectively does is to push the “minimum non-NREGS wage” really high indeed (I can’t intuitively put a number on it, but it could be as much as Rs. 200). My bet is that a lot of rural-economy-produced goods will turn out to be really expensive next year since a lot of producers might choose not to produce them given the high cost of labour.
Quite a few commentators have said that the NREGS is a noble scheme for empowering the poor, and given that most of the ‘work’ done is meaningless, it can be replaced by simple cash transfers. The problem is that if that is combined with yet another welfare measure such as cheap rice, it can create severe distortions in the market.
The moral of the story is that if you want to help the poor, please go ahead and do so. What you shouldn’t do is to help them twice over – that can result in severe market distortions like the one that the express article talks about. What is needed is greater coordination between the centre and the states in the welfare measures.