Chennai: Under the new rural employment guarantee scheme VB G RAM G, the spending by state governments would increase four-fold to Rs 35,300 crores in FY27. Some of the states like West Bengal, Uttar Pradesh, Punjab and Karnataka will see spending going up by 5 to 24 times. Meanwhile, man-days under MGNREGA in the June quarter have fallen to its lowest level in the last 12 years, finds Dhananjay Sinha, CEO and Co-Head, Institutional Equities, Systematix Group.
Five months into FY27, how much of the allocation for the Rural Employment Guarantee Programme has already been utilised? Is the spending on track or is it lagging because of the transition to VB G RAM G? How many person-days have been generated compared with the same period last year?
To really understand this, we have to look at what has been allocated for MGNREGA this year because there is an overall budget which includes VB G RAM G as well. Within the overall Rs 95,000 crore odd that has been allocated this year, roughly about Rs 30,000 crore was allocated for MGNREGA. This included the first-quarter allocation and any transition spending that was supposed to happen, including settling arrears.
As of the latest numbers, about Rs 18,300 crore has been spent, and a large part of that has gone into work wages. Compared with the overall Rs 30,000 crore allocation, there is definitely underutilisation.
In terms of employment provided in the first quarter of this year, roughly 622.6 million person-days of work have been provided. Compared with last year, this is almost 40% lower.
If we look at the 12-month average, the monthly average is about 159 million person-days. Compared with the previous 12 months, that is about 32% lower.
Clearly, this is a downtrend that we have seen over the last few years, particularly since the COVID years. During COVID, the government provided additional jobs to support rural families. From that peak, there has been almost a 53% drawdown. At the current level, the total number of person-days provided is the lowest in the last 12 years.
What could be the reason? Is it the transition to VB G RAM G or the changes in the new scheme that are causing this lag?
I would say this is structural in nature. Over the last five years, there has been a decline in allocation and utilisation. In the last three years, the allocation in the Budget was actually lower than what was demanded.
So, this is more like a de facto supply-side constraint that has been there.
We have seen overall allocations under rural schemes coming off, and that essentially aligns with the broader trend of fiscal consolidation. That could be the primary reason.
One also has to look at whether the relative wages that MGNREGA provides are actually lower than the wages available elsewhere. That could be one reason why people are opting for other occupations that offer somewhat higher wages. MGNREGA wages are roughly 20% to 25% lower than the usual wages available.
The new scheme increases guaranteed employment from 100 to 125 days. Will that translate into more actual work? Even under MGNREGA, the scheme could not provide the guaranteed 100 days in most cases.
It is 125 days compared with 100 days earlier, so there is a 25% increase. But the important thing is the nature of the new scheme.
VB G RAM G is more like a budget-driven provision of rural work, whereas MGNREGA was more of a guarantee available on demand. So, it is quite unlikely that VB G RAM G would perform better than MGNREGA because VB G RAM G is constrained by the top-down budget that has been allocated.
Within MGNREGA itself, on average, only 43 days of work was provided in a year. That is substantially lower than what was actually guaranteed, and roughly only 4% of workers could complete 100 days.
Therefore, it is quite unlikely that VB G RAM G will do better.
In FY26, the numbers were actually the lowest since 2012. More importantly, the guarantee component has been removed. The effective number of days could actually be similar to, or even lower than, what was provided under MGNREGA.
There is another important issue — the compliance requirements and digital architecture. These include biometric attendance, e-KYC and various apps that need to be used.
One essentially assumes that everybody has a smartphone and can comply with all these requirements. Because of this, implementation could result in greater slippage than under MGNREGA. Even under MGNREGA, some of these digital implementation requirements were responsible for lower person-days being provided.
As these digital requirements get intensified, VB G RAM G could actually perform worse compared with MGNREGA.
Under VB G RAM G, states will also have to share 40% of the total allocation. Will fiscally weaker states struggle to implement the new programme? Could differences in state implementation widen regional disparities in rural employment?
One important aspect that is not clear is how the Rs 95,000 crore allocation this year, and over time, will be distributed across states.
The document talks about a normative basis on which the allocation will be made, and that will be decided by the central steering committee in consultation with the state-level committee. But we do not yet know the basis on which the allocation will be made. That part remains unsettled.
The new scheme requires state governments to bear 40% of the total cost. This compares with 10% earlier. Over the last 10 years, the effective contribution of state governments was actually much lower.
So, the increase in the allocation that states will have to provide is going to be significant.
Based on MGNREGA spending last year, when about Rs 8,690 crore was borne by state governments, we estimate that this would increase to around Rs 35,300 crore in FY27. That is almost a four-fold increase.
Another calculation we did, based on the overall MGNREGA allocation over the last decade, also indicates that the burden could be almost five times higher for states compared with what they had actually been allocating.
Clearly, both estimates indicate a significant increase in the burden on state governments.
This is also going to create disparities because the 40% contribution is uniformly applicable across states, barring the northeastern and hilly states. It does not really take into consideration the differential fiscal situations of various states.
States with weaker fiscal positions will face a much higher burden. This creates a distortion and could accentuate disparities.
State governments may have to rationalise spending based on their fiscal situation. Many states are also implementing transfer and other schemes announced ahead of elections. All these expenditures could come under pressure as VB G RAM G is implemented.
The impact will be particularly significant in some states. West Bengal’s allocation could rise by 24 times, Uttar Pradesh by 21.3 times, Punjab by six times and Karnataka by 5.6 times between FY26 and FY27.
Richer and better-funded states may be in a better position to manage this. So there is clearly an asymmetric fiscal capacity, and the outcomes could be very different across states.
Have all the dues under MGNREGA been cleared before the rollout of the new scheme?
We do not clearly know what the status is. We have to rely on various media reports, and several states have expressed discomfort and dissatisfaction. There are voices from various state governments saying that dues have not really been cleared, whereas the central government claims quite the contrary.
So there is a substantial difference in opinion, and we do not really know how much has been settled.
One indicator to look at is that if the central government has allocated roughly Rs 30,000 crore for MGNREGA, I would assume that this includes an amount earmarked for arrears as well.
Since utilisation has been lower, my guess is that those arrears have not really been settled as yet.
In the new scheme, is the emphasis shifting from providing employment on demand to creating durable rural assets? Will rural infrastructure improve because of this, or will rural employment get affected?
There is a huge amount of centralisation in the new framework.
MGNREGA was essentially work emanating from the panchayat and village levels, and a lot of it was also geared towards asset creation.
What the new scheme does is align everything under the Viksit Gram Panchayat plan and eventually with the Viksit Bharat National Rural Infrastructure Stack.
So, there is a lot of centralisation happening.
There is a shift from decentralised employment-guarantee plans towards a more centralised plan. The central government essentially decides a lot of the plans, while state governments implement them. At the same time, the fiscal burden shifts increasingly towards the states.
There will also be considerable monitoring of how schemes are implemented at the village level. Clearance of allocations will depend on the monitoring mechanism.
This could constrain the purpose of the scheme. It is not going to be a guarantee; it is more of a budget-driven or allocation-driven provision of schemes.
If a state is unable to meet various stipulations, there could be delays in payments. And if total spending exceeds the normative budget or allocation, state governments will have to bear the additional cost.
Clearly, this was not the case under MGNREGA.
This year is an El Nino year, and normally we see an increase in demand for guaranteed work during such periods. Will the new scheme be able to meet the increased demand this year?
As far as the El Nino year is concerned, it is clearly impacting rural sentiment. Even outside the El Nino phenomenon, income and employment sentiment in rural areas has been fairly lacklustre over the last several years.
The El Nino effect could accentuate distress in rural areas.
We are seeing this in various indicators. When we track consumer companies, demand for basic goods and entry-level products has been fairly weak, while companies have been focusing more on urban and premium products.
Deficient monsoon and lower production will have an effect on rural wages and rural incomes.
As far as VB G RAM G is concerned, the scheme does not really take this phenomenon into consideration because it is normative in terms of how allocation is made and what the contribution of states should be.
So, in principle, it does not really address these problems.
As VB G RAM G has been rolled out only in July, what is your outlook for rural employment guarantee fund utilisation and person-days in FY27? Will it have an impact on the rural economy, rural consumption sectors such as tractors, FMCG and two-wheelers, and on GDP this year?
As far as agriculture and the rural economy are concerned, the IMD has talked about a 10% lower monsoon this year, and anything beyond that would be classified as a near-drought scenario.
Clearly, there is going to be an impact on overall production.
Sowing this year has been lower than the long-period average and also lower than last year. So, there is going to be an impact on overall acreage and productivity, and that will affect rural incomes.
With respect to fund utilisation, the total allocation under MGNREGA was about Rs 30,000 crore and utilisation has been much lower.
Implementation of VB G RAM G will have initial teething problems. As a result, I do not expect too much impetus from the scheme immediately.
We will need to see whether the new scheme can increase actual person-days beyond the 43 days that we saw under MGNREGA.
VB G RAM G talks about 125 days, but whether that will be significantly different this year remains to be seen.
Another important aspect is wages. The notified average wage under VB G RAM G is about Rs 327 a day, which is around 10% higher than MGNREGA. But MGNREGA wages have shown virtually zero year-on-year growth, while rural inflation is above 4.5%.
So there is stagnation in rural wages. In real terms, rural wages are actually declining.
The question is whether implementation of VB G RAM G can make a significant difference. Rural wages in June were about Rs 454 per day. Even at Rs 327 per day, VB G RAM G wages are lower than the average rural wage.
Therefore, it is unlikely that this scheme, in its current form, provides enough wage arbitrage to attract a large number of workers.
Weather-related disturbances, monsoon shortfalls and other deficiencies are likely to affect the rural economy, agriculture, wages and incomes.
Over the last five to six years, the dependence of workers on agriculture has increased. The recent Middle East crisis has also increased the cost of living in urban areas, leading some people to migrate back to rural areas.
So we have a combination of agricultural disturbance and increased labour supply in rural areas.
The government will therefore need to think about the broader rural allocation, which has been moderated over the last few years because of fiscal consolidation.
This year, they may need to make an exception and allocate much more than what has actually been budgeted.
That makes the transition from MGNREGA to VB G RAM G particularly important to watch this year. The combination of weaker rural demand, possible weather-related stress, lower person-days and a significantly higher fiscal burden on states could determine how effectively the new rural employment framework supports rural incomes and consumption.
Disclaimer : This story is auto aggregated by a computer programme and has not been created or edited by DOWNTHENEWS. Publisher: deccanchronicle.com
