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Human Capital and Development pp 103–128Cite as

Understanding NREGA: A Simple Theory and Some Facts

Abstract

The government of India has implemented the National Rural Employment Guarantee Act (NREGA) in recent past, to complement the income of the poor by providing them employment for certain number of labour days in a year. In this chapter, using a simple theoretical framework, we have analysed the impact of NREGA scheme on (1) rural labour market, (2) income of the poor households and (3) overall agricultural production. We show that in some situations the poor may exhibit a backward-bending supply curve of labour which may lead to an aggregate reduction in agricultural output. This adverse production effect can arise even when the NREGA activities lead to a moderate improvement in agricultural productivity. Some empirical facts validate our concerns and the data on food prices tend to support our finding to some extent.

Keywords

  • Labour Market
  • Labour Supply
  • Poor Household
  • Surplus Labour
  • Rich Household

These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Notes

  1. 1.

    This section borrows from Basu et al. (2005).

  2. 2.

    There are eight specific types of works listed in the NREGA: (1) water conservation and water harvesting; (2) drought proofing including afforestation; (3) irrigation canals; (4) provision of irrigation facility to land owned by SC and ST, and land of beneficiaries of land reforms and of Indira Awaas Yojana (IAY) (rural housing for poor); (5) renovation of traditional water bodies; (6) land development; (7) flood control works; (8) rural connectivity to provide all weather access; and (9) any other work, which may be notified by central government in consultation with state government (see Mehrotra 2008 for more discussion on this issue).

  3. 3.

    All the data cited in this chapter are from the relevant government of India websites like http://www.agricoop.nic.in/ and http://nrega.nic.in/netnrega/home.aspx. Further calculations are done by authors.

  4. 4.

    Much has been written about NREGA both in favour and against the programme. Some argued that the NREGA was unnecessary because in any case poor agricultural workers had a very low unemployment rate (Business Standard, 25 December 2004).

  5. 5.

    The productive value of NREGA works is also something of a mystery. The general impression is that they are mostly useless. Some dismissed them as a futile attempt “to play with mud, to create a road that goes from nowhere to nowhere, to dig ditches that will be washed away in the next monsoon” (The Hindustan Times, 14 February 2008). This verdict, however, is hard to substantiate or negate, and we leave this again as a subject of empirical enquiry.

  6. 6.

    Basu et al. (2010) found in their sample that 94% of land is inherited, while 2% is purchased, and the rest of land is obtained either as gifts or through share cropping or through encroachment of village commons or forests.

  7. 7.

    The standard textbook in Development Economics always work with such a scenario (for instance, see Basu (1997) and Ray (1998)).

  8. 8.

    This relies on the assumption that substitution of labour by machine is not possible in the short run. However, there are evidences that the demand for labour saving technology such as tractors and harvesters has gone up in response to NREGA in some states like Haryana and Punjab in India.

  9. 9.

    There is evidence that the labour market is imperfect and characterised by market power in both rural and urban areas (Bardhan and Rudra 1981; Bardhan 1979, 1984; Binswanger et al. 1984; Card and Krueger 1995; Datt 1997; Manning 2005). Mukherji (2005) explored the relationship between wages and employment in a spectrum of labour market structure. He argued that when the labour market is non-competitive, the “unique link” between wages and employment break down, and thus, the rise in minimum wage does not necessarily reduce the employment.

  10. 10.

    Basu et al. (2010) used a similar utility function for the household in the context of child labour supply. They found that given the fixed target income of the household, the child labour supply behaves as inverted U shape with respect to the landholding of the household.

  11. 11.

    Here we have presumed that with excess supply of labour it is not possible to reach the target income with such a low wage for the poor households.

  12. 12.

    Note that if the wage rate w  >  w h, then the poor would decide not to cultivate their land and only supply the labour to the rich household. In that case l p  =  0. This is the case when the poor households become agricultural labourers and stop cultivating their own land.

  13. 13.

    There is also the possibility that the poor households reach their target income only from cultivating their own land. In that case the labour market vanishes at the prevailing wage. We leave this uninteresting case out.

  14. 14.

    One can increase the size of the village by replicating the number of households in the given proportion, and all our results in this section would still hold true.

  15. 15.

    The detailed calculation can be obtained from the authors on request.

  16. 16.

    Nikhil Dey, the Mazdoor Kisan Shakti Sangathan.

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Acknowledgement

We are grateful to Nancy Chau, Deepti Goel, Bishwantath Goldar and J. V. Meenakshi for helpful comments on an earlier version of this chapter.

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Authors and Affiliations

  1. Indian Statistical Institute, Kolkata, India

    Diganta Mukherjee

  2. Department of Economics, Delhi School of Economics, University of Delhi, New Delhi, 110007, India

    Uday Bhanu Sinha

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  1. Madras School of Economics, Chennai, 600 004, Tamil Nadu, India

    Natteri Siddharthan

  2. , Humanities and Social Sciences, Indian Institute of Technology Bombay, Mumbai, 400 076, Maharashtra, India

    Krishnan Narayanan

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Mukherjee, D., Sinha, U.B. (2013). Understanding NREGA: A Simple Theory and Some Facts. In: Siddharthan, N., Narayanan, K. (eds) Human Capital and Development. Springer, India. https://doi.org/10.1007/978-81-322-0857-0_7

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