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Urban MGNREGS on the doorstep, but wages can make stealing business from China harder

Nobody can claim that Modi govt’s intentions are misguided. India must create jobs in cities as these hubs of modernisation are more productive than villages.

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The Narendra Modi government is planning to launch an urban job guarantee scheme on the lines of MGNREGS, or the Mahatma Gandhi National Rural Employment Guarantee Scheme. While under consideration since last year, the urgency triggered by Covid-19 has reportedly helped build consensus around it. Those in power hope that in addition to providing jobs to unemployed urban workers, the Rs 35,000-crore programme that guarantees 100 days of assured employment in certain towns would also boost spending. The scheme looks attractive; indeed, many economists and activists have argued in its favour. However, an urban MGNREGS deserves a more critical look.

Also read: Raghuvansh Prasad Singh — Lalu’s conscience keeper and the driving force behind NREGA

Jobs, spending and a $5-billion facelift

Nobody can claim that the government’s intentions are misguided. India surely needs to create better jobs in cities because these hubs of modernisation are much more productive than villages. A severe lockdown brought the economy to a screeching halt in the first quarter of fiscal 2021, but GDP was already decelerating for the past nine quarters.

Depressed consumer demand is surely to blame for this downward spiral, so there is immense pressure on North Block to loosen the purse strings. And given the state of our smaller cities, who can argue that an infrastructure push is a bad idea?

Also read: Don’t absolve Modi by saying he doesn’t have the right team to bring in economic reforms

It’s the politics, stupid

Yet, we urge caution. Researchers at the Azim Premji University — strong votaries of the idea — estimate that it could cost Rs 4,50,000 crore to guarantee 100 days of employment to each adult resident in all of India’s small towns — almost equal to the money we spent last year on national defence. For now, the Modi government has less than a tenth of this amount in mind. But the bill for an on-demand employment scheme with favourable optics can rise rapidly since no electorally minded government will risk political capital by scaling it back.

However, a potentially everlasting scheme, growing in costs, is a singularly bad idea to use for reviving demand, which is best addressed by a short-term surgical stimulus that can be swiftly withdrawn as domestic spending revives. Only the latter keeps debt, deficits, and inflation in safe territory.

Also read: Not Sushant Singh Rajput, not Rhea Chakraborty. It’s the economy, stupid

Wither Make in India?

Another important question is the effect this scheme will have on wages and thus the private sector activity. Several states have rolled out urban employment guarantees (Jharkhand being the latest) but we have little evidence on their impact. In contrast, MGNREGS has been researched extensively – a seminal paper finds that the programme raised wages by 5 per cent and caused an almost one-for-one decline in private sector work. Despite its many successes, the fact that the world’s biggest workfare programme created hardly any new jobs is disappointing.

Crowding out private sector employment can have other repercussions too. Before the 2008 global financial crisis, a boom in construction and real estate pulled millions of Indians into cities and out of poverty for the first time. Rising wages do little to help these sectors grow fast. There is also growing evidence that even our most labour-intensive industries are substituting away workers for machines due to high and rising relative costs of employing labour – a tragedy for a country of 1.3 billion souls. If an urban employment guarantee raises salaries by a lot, stealing business from China (and increasingly Vietnam and Bangladesh) will become that much harder.

Also read: SBI report says rural economy is losing steam, flags rising unemployment and fall in wages

Look twice before crossing

Depending on its fine print, an urban job guarantee scheme can have other perverse effects. Jharkhand’s scheme requires five years of urban domicile before workers become eligible for its benefits. But artificial restrictions on migration can hamper urbanisation and impede structural transformation. They can also breed highly segmented labour markets that generate opportunities for rent-seeking and workers’ exploitation.

We should first study the results from these state-wide schemes carefully — ideally over the next few years — before implementing a pricey national version.

Also read: 10.1% who killed themselves in 2019 were unemployed, Maharashtra tops suicide chart — NCRB data

MGNREGS, mighty on its own

Finally, many see in this scheme the first social protection measure for migrant workers. But in markets tightly interlinked — as villages and cities in India are — providing insurance in one also provides a safety net to the other. To give a counterexample, this wouldn’t be true in China, courtesy their infamously restrictive hukou system.

The Modi government proactively supplemented MGNREGS’ kitty with Rs 40,000 crore when confronted with the scale of the reverse migration taking place; most of these returning workers made full use of the expanded scheme and are now returning to cities, bringing down urban employment figures as they arrive. But the painful spectacle of workers migrating on foot en masse is not lost on us. We can perhaps take solace in the fact that a disruption of this magnitude is unlikely to reoccur. Given the exceptional situation in April, the government should have followed through with a one-time cash transfer even if it meant some mistargeting.

Also read: India’s Gen Z is getting left out of formal jobs, paid less, LSE study says

So do nothing?

A number of urban development programmes have been launched over five years with PM Awas Yojana, AMRUT, and the Smart Cities Mission being the flagship ones. According to official figures, over 1.7 crore jobs were created under PMAY(U), 1.2 crore water and sewerage connections provided under AMRUT, and green projects worth Rs 2 lakh crore have already been approved across hundred smart cities. Despite these investments, plenty of earmarked funds still lie unspent – the government can front-load expenditure on these mission-mode schemes to inject demand and build sustainable urban assets.

One also hopes that the ambitious National Infrastructure Pipeline (NIP) doesn’t become the ten-millionth victim of this pandemic. The Modi government should consider spending more than the 39 per cent it has allotted to itself under the NIP to ease the burden on state governments and businesses. While these measures help crowd in private investment, expediting reforms in real estate and promptly addressing the crisis in banking would reduce supply constraints. Prime Minister Modi’s Make in India vision remains a grand idea; it surely deserves another wholehearted attempt before replacing the prowling metal lion with a final monument to India’s jobs problem.

The author, @sarthak13agr, is an economist from Oxford University and a former researcher at the Institute for Fiscal Studies, London and the World Bank, DC. Views are personal.

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