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MultiplieracceleratorsynergyinNREGAOPINIONTheHindu

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TODAY'SPAPEROPINION

April30,2009

MultiplieracceleratorsynergyinNREGA
MihirShah
TheconceptsofmultiplierandacceleratorborrowedfrommacroeconomictheoryilluminatetheenormouspotentialofNREGAandhelpset
standardsthatitmustbejudgedby.
Overthelastfewmonths,justastheeconomyentereditscurrentrecessionaryphase,themainstreammedia,whichtillthenhadbeen
uniformlyunswervingintheirantipathytoNREGA(NationalRuralEmploymentGuaranteeAct),suddenlybegantosingitspraises.Inallthe
gloomanddoom,wearetold,ruralIndiaisshining.
AllthistalkofashiningruralIndiamust,ofcourse,bedismissedasitwasbytheelectoratefiveyearsago.Indiascountrysidecontinuestobe
characterisedbyasluggishagrarianeconomy,marredbymalnourishedchildrenandanaemicwomen,asalsosuicidebyfarmersindistress.
ButthereisnoquestionthatNREGAhasputmoneyintothehandsofthepoorestofthepooronascalethatisunprecedentedinthehistory
ofindependentIndia.
Theconceptsofthemultiplierandacceleratorborrowedfrommacroeconomicsandadaptedtoanagrarianeconomyhelpexplainwhatsuch
moneycoulddoinarecession.Tillthe1930s,mainstreameconomictheorywassteadfastinitsdenialoftheverypossibilityoflargescale
unemploymentundercapitalism.Theworkoftwogreateconomists(MichalKaleckiandJohnMaynardKeynes),followingupontheGreat
Depressionof192933,changedthisviewforever.Theyshowedthatwithoutappropriategovernmentintervention,widespread
unemploymentwouldbeacharacteristicfeatureofcapitalism.
Governmentintercessioninarecessioncantaketheformofvariouscountercyclicalpoliciestostimulatedemand.Oneistoreducetaxesso
thatthereismoremoneyinthehandsoftaxpayers.AnotherisalargescalepublicworksprogrammelikeNREGA,whichcreatespurchasing
poweramongworkers.WhenthosereceivingtaxbreaksorworkingonNREGAsitesspendthisadditionalmoney,theycreatedemandfor
commodities.Theproductionofthesecommodities,inturn,createsdemandforcapital,rawmaterialsandworkers.Theextraincomesso
generatedcausefurtherdemand,whichagainprovidesastimulustoproduction,employmentanddemand...andsooninaspiral.This
demandstimulatingprocessiscalledthemultiplier.
Thevalueofthismultiplierdependsonthemarginalpropensitytoconsume(mpc)ofthosebenefitingfromgovernmentintervention.The
mpcisourextraspendingoutoftheadditionalrupeeweearn.Clearly,thehigherthempc,thegreaterthestimulusprovidedtodemand.The
greatthingaboutNREGAfromthispointofviewisthatitisputtingmoneyintothehandsofthosewhosempcisthehighest.Thoseonthe
marginsofexistencearemorelikelytospendthansavemostofwhattheyearn.
ThisexplainsthecelebrationofNREGAinthemedia.Apparentlydemandintheeconomyisbeingsustainedbyruralbuying,whichhas
receivedaboostfromNREGAincomes.ButthisisnotevenhalfofNREGAsfullpotential.ForNREGAismuchmorethananadhocrelief
programmedishingoutdoles(orwhatthesedaysaremorefashionablycalleddirectcashtransfers).Itpromisestransformationofrural
livelihoods.TounderstandhowNREGAcandeliveronthispotential,weneedtograspacuriousunrecognisedfactaboutagriculturallabour
inthemostbackwardregions.
NotmanypeopleknowwhatdatafromtheRuralLabourEnquiryoftheNationalSampleSurveyconfirms,thataveryhighproportionof
agriculturallabourhouseholdsinIndiaactuallyownsland.Thepercentageisaround50inRajasthanandMadhyaPradesh,60inOrissaand
UttarPradeshandover70inChhattisgarhandJharkhand.AndifwefocusonAdivasis,theproportionshootsuptoashighas7687percent
inChhattisgarh,JharkhandandRajasthan.
Whyarethesefactsimportant?BecausetheyhelpusunderstandthatNREGAworkersarenotjustconsumersstimulatingdemandina
recessionaryeconomy.TheyalsoincludeproducersmillionsofsmallandmarginalfarmersforcedtoworkunderNREGAbecausethe
productivityoftheirownfarmsisnolongerenoughtomakeendsmeet.NREGAwillbecomereallypowerfulwhenithelpsrebuildthis
decimatedproductivityofsmallfarms.Publicinvestmentintheprogrammeincentivisesprivateinvestmentbysmallfarmersandgivesthem
achancetoreturntofulltimefarming.Ihaveseenhundredsofsuchexamples,especiallyinthecentralIndiantribalbelt,arguablythe
poorestpartsofthecountry.Hereearthendamsoncommonlandhaverechargedwellsofthosepoorfarmerswhoearlierworkedaslabourers
tobuildthesedams.Thesefarmersarenowbusymakingaseriesofinvestmentstoimprovetheirownfarms.
Thus,amutuallyreinforcingrelationshipbetweeninvestmentandincomeiscatalysedbyNREGA.First,investmentgeneratesdemandand
incomethroughthemultiplier.Then,incomestimulatesinvestmentviatheaccelerator.Givingrisetoaspirallingcyclerepeatedinsuccessive
rounds.Althoughnotusuallydeployedinsuchacontext,theacceleratorprincipleinmacroeconomictheorydescribesthepositiveimpactof
growingincomesonprivatefixedinvestment.Risingincomesalsoimprovecapacityutilisationandhappierexpectationsactasincentivesfor
moreinvestment.UnderNREGA,farmershavecomebacktolandtheylongabandoned,asincreasedoutput,inanatmosphereofrenewed
hope,spursfurtherinvestment.ConvergingNREGAwithotherprogrammesforrurallivelihoodswouldcarrythismomentumforwardina
positiveupwardspiral,whichwillbroadbasethegrowthprocessviadownstreammultiplieracceleratoreffects.Effectivelyawage
employmentprogrammecanthusbetransformedintoasourceofsustainablelivelihoodsgeneratingselfemployment.Whichwouldpermit
reductionsinallocationsforNREGAovertime,notonlybecauselandedlabourersgetbacktotheirownfarmsbutalsobecauseofageneral
riseindemandforlabourintheruraleconomy.
Tenyearsago,inourbook,IndiasDrylands,mycolleaguesandIsketchedpreciselythiskindofscenario.Withthekeyprovisothat
investmentsinanemploymentguaranteeprogrammemustbeinproductive,ecofriendlyassets.Thiswouldensurethattheresultantgrowth
dynamicisbothsustainable(byregeneratingtheenvironment)andnoninflationary(byeasingtheagrarianconstraint).Notonlydoes
demandneedstimulation,growthhastobesustainableinbotheconomicandecologicalterms,especiallyinthesetimesofclimatechange.So
http://www.thehindu.com/todayspaper/tpopinion/multiplieracceleratorsynergyinnrega/article319941.ece

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7/15/2015

MultiplieracceleratorsynergyinNREGAOPINIONTheHindu

whatwerequireisnotjustastimulusalaKeynesbutaspecificnewkindofstimulusalaSchumpeter!
ThereisnowaythismultiplieracceleratorsynergycanfullycomeintoplaywithoutthemostimportantpieceoftheNREGAjigsawfalling
intoplaceradicalgovernancereform.NREGAisarevolutionaryActthatseekstobringrealdemocracytoIndiasgrassroots.Byreplacing
thecontractorraj,whichhasdominatedruraldevelopmentinIndia,withPanchayatRajplanning,implementationandsocialauditof
worksbygrampanchayatsundertheoversightoftheGramSabha.Thisrequiresthecreationofanewcadreofdedicatedexecutiveagencies
servingpanchayats,withateamofbarefootengineersandsocialmobiliserssupportingthem.OnlythencanNREGAyieldrejuvenated
watershedsandrechargedwatertables.Withoutwhichthemultiplieracceleratorsynergywillremainadistantdream.
Radicalgovernancereformchallengestheveryfabricofruralsocialrelations.Strongstatesupportisessentialtodismantlethefossilisedyet
exploitativesystemandtobuildaneffectivealternative.Eventhefewhesitantstepsinthisdirectionhaveproducedaviolentreaction.Aswe
approachthefirstanniversaryofthemartyrdomofLalitMehta,acrusaderintheNREGAcause,itistimetoremindthestateofitsdutyto
protecttheunsungheroeswhocontinuetorisktheirlivestomakeNREGAasuccess.
Whileenteringuntestedwaters,thereareotherfreshchallenges.Paradoxically,theattempttocheckcorruptionbymakingpaymentsthrough
banksorpostofficeshasbackfiredintransition.TheadditionalNREGAloadisprovingimpossibletohandleandworkersalsofindithardto
reachthesesparselylocateddistantoffices.Localeliteswithgreatermobilityandaccesstakeholdofworkersjobcardsandswindlethemby
fudgingentriesbothonjobcardsandthecentralisedcomputerdatabase.Asthesocialauditprocesspicksupandworkersbecomemore
awareofthescamstakingplaceintheirname,thingswillimprovebutthereisnoalternativetomakingbanksandpostofficesbetter
equippedandmoreeffective.Couldtheseexpensesbemetthroughthe6percentadministrativecostsprovidedunderNREGA?NREGAhas
fallenshortofitspotentialbecausethepreparationneededforthisrevolutionaryActwasnotinplacebeforeitwaslaunched.Letusfocus
radicalgovernancereformsonthe200mostbackwarddistrictsorevenbetter1,000mostbackwardblocks.WhereNREGAreallymattersand
shouldhavebeenrestrictedtointhefirstplace.Ifanewarchitectureofimplementationisputinplacehere,wecouldseenotonlythe
multiplierbutaproductivityenhancingacceleratorinactionthattransformslivelihoodsformillionsofourpoorestpeople,inamannerthat
issustainableinbotheconomicandecologicalterms.
(Dr.MihirShah,aneconomist,isamemberoftheCentralEmploymentGuaranteeCouncil.)
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