How Not to Help India’s Rural Poor

This Op-Ed of mine was published in the Wall Street Journal Asia today.

Politics is often about grand gestures, and the Congress Party’s 37-year-old new general secretary, Rahul Gandhi, understands this perfectly. Shortly after landing his position last month, Mr. Gandhi demanded that Prime Minister Manmohan Singh extend a massive cash redistribution scheme, the National Rural Employment Guarantee Act (NREGA), to all 593 districts of the country. Mr. Singh duly assented.

If this is an indication of Mr. Gandhi’s power—and how he might use it in future—it’s not encouraging. The NREGA was enacted early last year by the Congress-led coalition. The act guarantees the government will provide 100 days of work every year to every rural household in India—there are no reliable figures on exactly how many of these there are—at an estimated total cost of $3 billion before the newly announced expansion. First launched in 200 districts, it was expanded to another 130 in the last fiscal year.

As expected, NREGA has proved little more than a siphon for corrupt bureaucrats, not a boon to the poor. And now, there are numbers to back up that assertion.

Last month, the Delhi-based Society for Participatory Research in Asia, a non-profit organization, released a preliminary study on NREGA’s governance. The results are shocking. In the financial year beginning in April 2006, only 6% of the households registered under the scheme actually received their 100 days of employment. PRIA’s study also cited shoddy implementation practices across 14 of India’s 28 states. In the surveyed villages, only 45% of registered households had even applied for work under the scheme. And of those households that had applied for a job, only 44% had received one within the required 15 days.

PRIA’s results mirror the findings of another study carried out by the Centre of Environment and Food Security earlier this year. The CEFS study focused on the state of Orissa, and found that about 75% of the funds spent in Orissa had been “siphoned and pocketed by the government officials.” “We could not find a single case where entries in the job cards are correct and match with the actual number of workdays physically verified with the villagers,” the study noted. Out of a total $187 million in public monies spent in the state during the 2006-2007 fiscal year, around $127 million was effectively stolen.

This kind of wastage shouldn’t come as a great surprise. India’s bureaucrats hold effectively tenured positions, and are often unaccountable to the public they serve. Their incentives are tailored only toward increasing their power and their budgets. Government is not transparent, and most common citizens do not contemplate legal recourse against it, as the legal system is dysfunctional and the rule of law is weak.

Instead of promising government jobs to agricultural workers, India’s government could do far greater good by stimulating competition—and investment—in rural India. As it is, government too often gets in the way. For example, one law limits the geographic area in which farmers can sell their produce, and some states require farmers to sell to monopolist distributors. Another law restricts produce shipments across state lines. Topping it all off, India is one of the biggest defenders of market-distorting agricultural tariffs in the World Trade Organization’s Doha Round negotiations.

The National Rural Employment Guarantee Act is symbolic of everything that’s wrong with India’s approach to economic reform. What’s needed is not grand gestures and more handouts, but a comprehensive review of how to stimulate private investment and entrepreneurship. Mr. Gandhi should understand that there is no better guarantee of employment than economic growth.

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Also read: My Op-Ed in WSJ two years ago about the NREGA, Good Intentions, Bad Ideas.