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Resource centre on India's rural distress
 
 

Cap & trade, Nrega style by Subhomoy Bhattacharjee

Good sections of rural India don’t want NREGA any more, showing the government spending pattern on the scheme. Since a large percentage of the village labourers have moved to the cities, it makes far better sense to develop an unemployment dole for them.

The subtext is an accounting arrangement that ensures that like NREGA, the government can keep on rolling out similar entitlement programmes like the proposed Food Security Act, but the hit on the fisc will be far less than the projected expenditure. The fiscal deficit does not balloon even as the vote bank is kept happy.

On the face of it, it does not sound possible that the government spends less than what it claims to do on NREGA. But a closer look at what the finance ministry is giving out and the rural development ministry is spending from yields interesting insights. To understand, one has to look at the way funds have been made available for the scheme. NREGA is a demand-driven scheme. This means the government has to keep ready a sum for disbursement to the states whenever they produce a bill for the spend.

So, in 2009-10, when the government transformed NREGA into a pan-Indian scheme, operating in all rural districts of the country, it also created a National Rural Employment Guarantee Fund (NREGF). The idea behind the setting up of the fund was to limit the liability on the finance ministry and therefore of the government of India. In normal circumstances, the rural development ministry will keep on presenting its bills to the finance ministry. Those demands or bills will be met in the usual course of business by the finance ministry. North Block has meanwhile made an estimate of the actual ability of the various state governments to spend money in the rural employment and asset generation programmes through earlier but less grand-sounding schemes. The estimate justifies a spending plan of R40,000 crore per year.

What the fund does is to provide for the rainy day when expenditure on the scheme will shoot up, which could happen if demand shot up. But since the fund is parked in the Public Accounts, distinct from the Consolidated Fund of India, expenditure from there will not add up to the fiscal deficit. This is the same method the government adopted for the National Small Savings Scheme in 1999 when the massive transactions in small savings made the budget numbers lousy each year. This is also a ready and, of course, a neat way to ensure the demand on the finance ministry does not exceed R40,000 crore annually, whatever the scene in the rural areas.

In other words, the finance ministry was ensuring a cap on the open-ended nature of schemes like NREGA. But the similarity with the National Small Savings Fund (NSSF) ends here. NSSF is real money as it is generated from deposits made by individuals. Since no cess or other levy finances NREGF, it is a fungible cash arrangement, much like the limited cash that banks maintain to service all demands for cash withdrawal. The advantage of pencilling in a number in the fund is it smoothens the creases of the social expenditure programmes, giving huge support to the fiscal arrangement.

As the table shows, in 2009-10, of the R56,110 crore that was available in the fund, the government did not use a single paisa. The final accounts for the year released by the Controller General of Accounts show there was zero disbursement from the fund. The actual total spend for the year was R33,539 crore, spent outside the fund.

The fund mechanism allows the government to (a) project a far higher expenditure on rural development at the beginning of the year, but (b) provide a lower sum on the field and, despite the expenditure (c) demonstrate a tight fiscal deficit at the end of the year, as a sign of prudent expenditure management. The positioning of the fund in the Public Accounts allows the finance ministry to achieve the impossible.

This became evident last fiscal. At the beginning of the year, the fund, as a part of the projected expenditure, showed a figure of R67,316 crore. In a tight fiscal year, the government had to dip into the fund. But while actual disbursals from the fund towards NREGA and assorted expenditure shot up to R46,202 crore, at the end of the year the government cut the size of the fund to R50,460 crore, a drop of R17,000 crore. At the same time, the government told the world it had spent “more” on NREGA at R40,100 crore, entirely financed from the fund.

This stratagem will be in use in 2011-12 again. If there is a consistency from the estimates of 2009-10, the fund should have a surplus of near R20,000 crore. But the initial deployment in the fund is R58,768 crore. If we take the R20,000 crore as the working surplus, notionally available with the fund, the additional spend for the government on NREGA will be only R20,000 crore. In the management of the cash balances across the ministries, that is indeed what the government will spend. And then, depending on where the finance ministry will like to target the fiscal deficit, the withdrawal from the fund will be inked in.

The level of expenditure shows the effective demand for NREGA support at the rural level is far lower than the government will care to admit. This is not surprising as the rural areas empty out towards the urban centres, as the demographics show. It then makes for more sensible policy to deploy the funds for larger urban development programmes. The other implication is that the fiscal arithmetic of the government could be far tighter than what the markets estimate.