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Explained: What is MGNREGA? How Does the MGNREGA Scheme Work?

Nov 3, 2021 3:55 AM 5 min read

Halfway through FY22, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is running dangerously in the red.

Most states have utilised the entirety of the Budgeted allocations for the current fiscal year. As of November 2nd, the net balance of the Indian Government’s flagship rural employment scheme stands at -₹8,807cr (-$1.17bn) as per its own financial statement.

What is MGNREGA?

The scheme is essentially a social security measure that legally guarantees the “right to work”. It provides 100 days of employment every FY to adult members of any rural household willing to do unskilled manual work at the statutory minimum wage.

The jobs provided by MGNREGA are public works-related, such as rural sanitation projects, flood management, construction, livestock management etc. Employment is to be provided within 5 km of the applicant’s residence. What’s more, work should be provided within 15 days of demanding the same, failing which the applicant is entitled to an unemployment allowance. And wages are required to be paid (usually via direct transfer) within 15 days of completion of work, failing which a compensation for the delay is to be paid.

MGNREGA is overseen by the Ministry of Rural Development (MRD). The Union Government fixes and releases the funds for the scheme and coordinates with state governments when it comes to implementation.

FYI: Besides ensuring employment in India’s towns and villages, MGNREGA was also envisioned as an economic barometer, especially of the country’s vast informal sector. More people availing the scheme’s jobs would mean fewer job opportunities in the formal economy indicating macroeconomic stress, and vice versa.

The Act came into being in 2005 after a lot of internal wrangling, u-turns and controversies within the ruling UPA coalition. Like “a wet dog at a glamorous party”, as economist Jean Drèze put it.

However, despite the political slugfest that manifested it and the chorus of criticisms that accompanied it, MGNREGA has come to embody something rare: a GoI policy that actually works quite well, and one that elicits bipartisan support today.

Often described as “the largest and most ambitious social security and public works programme in the world”, the legislation remains at the core of the Indian welfare state. Its popularity has survived successive governments and has withstood (and turned) criticisms levied against it.

The World Bank, for instance, once held that the scheme was a “policy barrier” to economic development. It now considers it as a "stellar example of rural development". Prime Minister Narendra Modi, meanwhile, used to be one of MGNREGA’s harshest critics, having labelled it as the “politics of dole” and mocking it as a “monument to [the] failures” of previous governments. Over the past few years, however, his government has expanded the scheme, consistently relying on MGNREGA (and the National Food Security Act) to provide rural citizens with a reliable safety net amidst demonetisation, GST implementation, the economic slowdown, and the pandemic.


Sirens Ablast

Cut to today, and every politician’s go-to welfare scheme seems to be on the tenterhooks. As of today, as many as 20 states show a negative net balance i.e. MGNREGA expenditures > Budgeted allocation for this FY.

Several states have rung the alarm bells and called for emergency supplementary funds to be deployed by the Union Government. But with the Winter Session of Parliament not due for another four weeks, the situation may get worse before it gets better.

This means the delays in wage payments to workers are likely to worsen in the near-term. With the festive season knocking and the economy remaining in dire straits, this development has been likened to “a clear constitutional breach committed by the State” and “a modern form of begar”.

What’s more, as with all things MGNREGA, the present shortfall of funds is also turning into a political slugfest. The Union Government has shrugged off responsibility, accusing states of artificially creating demand and saying they can plug the shortfall with their own money. “Once the [funds are] available, it can be reimbursed [by GoI],” an MRD official said. (This trend is not new and, naturally, it’s not the recipe for healthy centre-state relations.)

States and activists counter that this current crisis is of the Union’s own making since this year’s MGNREGA allocation was substantially low. They also argue that 13% of households who demanded work under the scheme were actually not provided work and turned away, so there’s no question of “artificially creating demand”.


How Did This Happen?

Two main reasons.

The first is the way the Budgetary allocations are decided each year. Besides being a secretive process, each year’s allotment includes provisions for last year’s dues. This means that if a state receives ₹X for MGNREGA in FY22 and it has ₹Y in arrears (mainly wage payments) from previous years, the actual amount it has in its kitty for FY22 is ₹(X-Y). Typically, about 20% of annual MGNREGA allocations is spent on clearing previous liabilities (last fiscal, this was 16%).

The second - and main - reason has to do with this year’s Budgetary allocation itself. The total allotment for MGNREGA this year was 34% less than the same in last FY’s revised estimates at ₹73,000cr ($9.75bn). GoI argued in February that the national lockdown was over, the worst of the pandemic was past, and economic recovery was on the horizon.

Of course, as we now know, this wasn’t what happened. The Second Wave struck India in April and economic recovery was stalled. Even today, recovery is limping. And with it, the number of MGNREGA workers who have not been paid their wages is escalating.


Caste Away

A recent report by the People’s Action for Employment Guarantee (PAEG) and LibTech India also found that wage delays this year have a strange caste component.

So, payment under MGNREGA is a two-step process. Once the work is completed, the respective panchayat/block prepares a Funds Transfer Order (FTO) with the worker’s details and sends the same to the Union Government. The next step involves the latter processing the FTO and transferring the wages to the concerned accounts.

Usually, a single FTO is sent by the states to the centre. But in March 2021, the Union Government directed states to send three separate FTOs - one for SC workers, one for STs and one for those in "Other" categories.

Out of the 18 lakh fund transfer order transactions from 10 states in April-September, 46% of SC workers received their dues within the mandated seven days while 80% got paid within 15 days after FTO approval. However, "among non-SC/ST workers, only 26% were paid within seven days, and 51% were paid within 15 days”. These discrepancies are more glaring in some states, like Madhya Pradesh, Jharkhand and Odisha. On the contrary, in Chhattisgarh, ST workers received funds earlier. And in Andhra Pradesh and Telangana that it was payments for SC workers that were being delayed!

The MRD continues to support the caste-breakup of FTOs, arguing that it was “introduced to accurately reflect on the ground flow of funds to various population groups” and that “further streamlining is being undertaken”. However, with some communities receiving funds and others kept waiting, social cohesion may be at stake. (Off-topic, but if GoI opines that accurate caste data can improve the efficiency of its schemes, shouldn’t that same argument hold true for a caste census?)

Meanwhile, millions of families continue to be plagued by non-payments. At worst, wage delays for you and me usually only translate to a postponed pay-day party or a delayed rent transaction. But in a country where the average household earns less than ₹10,000 ($133.6) a month, wage delays are the difference between a full plate and an empty stomach.


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