2010

MBA-AS(I year)

Abhishek Singh(22)
Vaibhav Chauhan( 6)
Vinit Jain(12)

[NREGA]
 NREGA
NREGA known as Mahatma Gandhi national rural employment guarantee act is a flagship program of
UPA government which came into existence in February 2006.It started initially in 200 districts and
within two and a half years spread to the whole country.

This scheme is aimed at improving rural India by providing job to people who are able and willing to
work under this scheme. The job consists of unskilled manual work. Under this program employment of
100 days in a financial year is guaranteed to people who volunteer to get themselves enrolled in it. The
beneficiaries get 95-100 Rs everyday for their work. People can come and get themselves enrolled in it.
Office remains open all over the year. The Panchayat or programme officer accepts the valid application
and issues dated receipt of the application. The employment is provided within a radius of 5 km. If it is
above 5 km, extra wage is paid Within 15 days employment opportunity has to be provided otherwise
state has to provide people with unemployment allowance , it also stipulates that within 15 days of work
money should be paid to people who are working under it.

The Central government meets the cost towards the payment of wage, 3/4th of the material cost and
certain percentage of administrative cost. It received Rs.40,100 crore in 2010-11.The state government
bears the cost towards unemployed allowance, 1/4th of the material cost and administrative cost of state
council. Financial strategies like opening banks and ATM are developed to disburse money to
beneficiaries in an efficient manner

Thus it helps in enhancing security, livelihood of the rural people. This helps in providing people with
more disposable income which help make them more self reliant. Government has instituted (PIN)
Professional Institutional Network which steadily intervenes in its functioning to make it more effective
and efficient. This has also been integrated with other government schemes to make growth of rural
India more inclusive and quick. It helps in creating assets by working on agriculture, water resources,
and resources, forests and roads. This has started showing results in rural India by reduction in poverty.
NREGA make green jobs. Jobs which helped arrest rising temperature, depleting water table and
deforestation NREGA beneficiaries will also be covered under the Rashtriya Swasthya Bima Yojana
(insurance cover package) that was given to provide health insurance cover to below poverty line
workers and their families. Villagers and (SHG) self help groups helps in spreading awareness about the
program. Rajasthan and Tripura are the states where this is working very effectively providing more
disposable income (saving) to rural people. Over 40% people enrolled are women providing a facelift
to Indian villages. This has resulted in multiplier effects in savings and financial security.
 Effect of NREGA on INDIAN economy

NREGA as multiplier
Finance Minster Pranab Mukherjee, while presenting the budget for fiscal 2009-10
announced an allocation of Rs. 39,000 crore for NREGA, an increase of 144
percent. In 2010-11 an allocation of Rs.40,100 crore was made towards this project.

When Government increases its expenditure from (previous) G to G1, there is an

increase in autonomous spending which is given by -
C0 + I + G – C1T  C0 + I + G1 – C1T
Because of this there is an increase in income as well as demand.

As s there is an increase in the autonomous spending the demand curve shifts

upward.
At the same level of income Y1 where the demand was Z1, it increases to Z2.
Now, since the demand is more the companies will have to produce more, and
therefore they have to make more investments, invest more capital, employ more
labor and thus there is further increase in salary to Y2 and the above cycle
continues till the point where for the same income level the present demand is
equal to the previous demand.
In other words the equilibrium point is the point where the demand curve meets
the 45 degree line.

NREGA, creates purchasing power among workers.

When those working on NREGA sites spend this additional money, they create
demand for commodities.

The production of these commodities, in turn, creates demand for capital, raw
materials and workers.

The extra incomes so generated cause further demand, which again provides a
stimulus to production, employment and demand . . . And so on in a spiral.

This demand stimulating process is called the multiplier.

NREGA as accelerator

According to a survey a very high proportion of agricultural labour households in

India actually owns land. The percentage is around 50 in Rajasthan and Madhya
Pradesh, 60 in Orissa and Uttar Pradesh and over 70 in Chhattisgarh and
Jharkhand.

When farmers and workers from these sections ( which include producers ) avail
the facilities of NREGA, they invest whatever savings they make under this project
in their lands. Which in turn helps these farmers to rebuilt the decimated
productivity of their farms. ‘Public investment in this project incentivises private
investment incentivises private investment’
In the central India tribal belt, arguably the poorest part of the country earthen
dams have recharged wells of those poor farmers who earlier worked as labourers
to build these dams.

I = S + T- G

Given the private saving, if there is an increase in the government deficit, the
investment must go down.
The crucial part of this statement is “given private saving”.
Considering the above example we can say that “ If the increase in private
savings(because of investments) is more than the increase in spending by
Government” then a fiscal expansion – an increase in spending, may actually
increase the investment.
Summarising the effect of NREGA using IS-LM Model

Here, we see that the IS curve will shift right wards. This implies that there will be
higher output and higher rate of interest.

But, the output depends on consumption, investment and government spending.

As the government spending is increased by over 140 percent, the farmers, the
workers and the labourers are getting higher wages, therefore their confidence is
also increasing and at the same time we have analysed the effect of NREGA as an
accelerator.
The investment is also increasing, together with the increase in government
spending and the increase in consumer’s confidence. Therefore there will be a shift
in the IS curve towards right.

i.e. at the same interest rate, income(output) will be higher.

 Effect of NREGA on unemployment

( NREGA helps reduce poverty, inequality: Report

New Delhi: The UNDP has highlighted India's rural employment guarantee scheme, popularly known as
NREGA, for its impact on reducing poverty and reversing inequality.

"Such robust social protection and employment programmes ... reduce poverty and reverse inequality," the
UN agency said in its progress report on Millennium Development Goals (MDGs), citing the National Rural

Employment Guarantee Act. ) (ZEE NEWS)

The scheme, renamed as Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS),
has benefited some 460 lakh households, UN agency said.
As the real wage is going up, unemployment is also getting reduced. Workers demand more wage, this can
be understood with the above graph.
Since there is an increase in the real wage there is an upward shift in the Price Setting relation and it moves
along the Wage Setting relation curve. The equilibrium position is attained at the coordinates(Un’, 1/(1+u’)).
Thus with an increased real wage, the unemployment rate is reduced from Un to
Un’.

NREGA, Inflation, Aggregate Demand and Aggregate

Supply
Does NREGA cause inflation? Well the answer, at least in the short run is yes. There are 2 major
reasons for it. Firstly, wage level rises due to it, causing demand to grow and secondly, it makes
agriculture unviable, putting pressure on supply side.
NREGA cause wage levels to rise across the country, and marginal propensity to consume of the weaker
section of society benefitting from NREGA being close to one, demand for food items increases
considerably. With supply remaining constant, it increases price level of food items causing inflation to
grow.
Also, NREGA creates shortage of farm laborers by giving higher wages to them. This causes supply side
bottlenecks as there aren’t enough hands at time of harvesting season when there is already high demand
of laborers. This further increases price level. To counter this, jobs should be offered in lean periods.

STATE INFLATION(MAR-OCT NREGA

2006) DISBURSEMENT(IN
LAKHS)
Punjab 6.4 1155
Bihar 11.5 55171
UP 6.3 49925
MP 10.9 156471
Orissa 11.9 76090
Rajasthan 6.0 75512
Tamil Nadu 1.1 11292
Karnataka 6.2 16530
Kerala 3.1 2180
Andhra Pradesh 8.2 90781

The above table shows state wise inflation rate for the period of March – October 2006, and spending on
NREGA for the same period. We can see that inflation rate is highest in those states in which
disbursement for NREGA is highest such as MP, Orissa, Andhra Pradesh. By contrast, inflation is much
lower in states like Punjab and Kerala where there is hardly any money disbursed for NREGA. This
shows clear impact of NREGA on inflation.
However, this phenomenon is short run, because in longer run assets created by NREGA activities such
as construction of wells and dams for irrigation purpose, leveling of roads, water conservation and
harvesting improves rural infrastructure and increases the supply, thus reducing inflation.
 Economics behind Inflation

AS Relation is given by P = Pe(1+µ)F(1 – Y/L, Z)

AD relation is given by Y = Y(M/P, G, T)

Since, there is an increase in the government expenditure, there is a rightward

shift in the AD curve and a new equilibrium position is attained at A’ from A, with
an increased output and increased price level. This increase in price leads to an
increase in the price expectation.

Shift in the AS curve

With an increase in the price expectations, the wage setters decide to increase the
wages. This results in an increase in price of the goods so produced. The increase
in price discourages the consumers to consume more. Thus the consumers reduce
their consumption. Thus the demand for the goods produced is less. This
discourages the producers to produce more.
Thus the output is reduced with an increased price level. The increase in expected
price level and reduction in the output continues till the point, where output is
equal to the original level of output, and the price level has increased to an extent.

We can say that the NREGA project may lead to an increase in the general price
level. As already we have seen a rise in the price level of general food items.

Short term inflation and Phillips curve

Phillips, Samulson and Sollow discovered a negative relation between the
unemployment rate and the inflation rate aroud 1960.

• Low unemployment leads to a higher nominal wage.

• In response to the higher nominal wage, firms increase their prices.
• In response to the higher price level, workers demand for higher nominal
wages the next time wages are set for the firm.
• The higher nominal wage leads firms to further increase their prices. As a
result, the price level increases further.
• In response to this further increase in the price level, workers, when they set
the wages ask for the further increase in their nominal wages.
• And so the race between prices and wages results in a steady wage and
price inflation.

Somewhere around 460 lakh households have benefitted from the NREGA project.
Thus in a very short period, employment has been provided to a large number of
people. Therefore they will demand for more goods. This in turn, leads to an
increase in the general price level.
 Fate of NREGA
With prices rising up and the poor people becoming more self sufficient and
independent, a day will come when the workers will start backing off from the
NREGA sites into their own fields. The workers can invest the savings made under
the NREGA project into their own entrepreneurial ventures. And the Government
too can reduce its fiscal deficit by reducing the capital allotted to the NREGA
project.

Bibliography
Books
• Macroeconomics( Fourth Edition ), Oliver Blanchard

Websites
• http://www.nrega.nic.in/netnrega/home.aspx
• http://www.nrega.net/
• http://en.wikipedia.org/wiki/Mahatma_Gandhi_National_Rural_Employment_Guarantee_Act
• http://knowledge.nrega.net/978/2/India.pdf
• http://www.zeenews.com/news635028.html