Thursday, October 31, 2019

Slowdown in Indian Economy and MGNREGA

Indian economy is under tremendous distress. There is slowdown in every sector from manufacturing to services to agriculture (Upadhyay, 2019a). Core sector is contracting (ET, 2019). The unemployment rate is historically at the highest at 6.1% in last four decades. Indian rupee is getting weaker. Export is falling. Fiscal deficit is expected to expand. There is already trade war going on in international trade. Prices of petroleum products are relatively increasing. Demands for normal goods are falling. There is slowdown all across spectrums but the (Veblen Goods) luxury goods (Mukherjee, 2019). This makes the whole picture really very peculiar for the Indian economy.

Considering the challenges, government is also responding through different measures to revive the economy back into the shape from corporate tax cut to stimulus package to increased spending (ET, 2019). From the measures mentioned in the stimulus package, it seems to suggest that the policymakers at helm in the government are of view that economy can be revived by focusing on corporate sector than any other sector. Looking at the structure and composition of Indian economy, by focusing on corporate sector mainly, it would be very difficult and time consuming process to stimulate growth and mainly rebuild the confidence in the economy.

A look on the rural and informal economy in India clearly indicates a very complex structure. The contribution of agriculture in the GDP is not very high and is falling every year on one side. While on the other side the decision making system seems to mistakenly equate the agriculture sector with the rural economy. But in reality rural economy is far bigger and complex than the popular perceptions. Rural economy consists of agriculture sector, formal sector as well as informal sector. There are large numbers of small as well as micro industries which are part of the rural economy. Of these industries some are formally connected in economic network but a large of portion of these firms are not formally integrated in economic network. All these components of the rural economy altogether employ the largest numbers of workers in the economy and more than fifty percent of working population is dependent on rural economy for income (Upadhyay, 2014). In fact the rural economy has been driving the demand for normal goods in the whole economy becoming the real growth driver.

The agriculture sector in Indian economy is already under distress (Iyer, 2018). The slowdown in the overall economy is hitting hard the informal economy as well as the small and micro industries because it is almost dependent on formal economy for its survival (Upadhyay, 2019b). These things together are making things very difficult for the rural economy to carry on its own because over time the rural economy has become dependent on remittances from urban centres to drive growth.

Whatever the government has done for these sectors does not seem to be enough. Government needs to augment the purchasing power of consumers in rural economy. At present increasing demand is the most important challenge in the hands of the policy makers. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) can be very helpful in this, though it's ad-hoc provision. Allocation to this scheme should be increased to broaden the scope of the scheme as well as increase in the wages under the scheme. But this should not be done without directly increasing farm income. Any increase in MGNREGA (budget or wages) without proportional increase in farm sector income has risk of high inflation phase like 2007-12. 
Also the government instead of sticking to fiscal discipline should finance infrastructure project even if fiscal deficit increases by one percent or even slightly more. But it must ensure that the whole amount of deficit completely converted into assets and is not expended for wages, salaries and operational expenses.

For some time MGNREGA is being suggesting being the panacea to all the problems relating to poverty, increasing inequality (Upadhyay, 2015) and the challenge of providing employment opportunities to millennials that Indian economy has been facing for around two decades. But if we look at long term perspective, MGNREGA in any way may not be a permanent solution. Basically MGNREGA was coined as ad-hoc solution under political compulsions and still is an ad-hoc solution. It can neither alleviate poverty nor can result into sustainable development but only provide disguised employment.

Considering the social and economic disparity in the country, such socially inclusive schemes are required to provide income sources to unskilled, semi-skilled and skilled labour. But the whole design of present MGNREGA is faulty with little economic sense and perhaps with motives to avoid some serious and difficult questions about disparity. It, on its own, has never been able to create any asset until and unless the provision of it being clubbed with other schemes like Prime Minister Gramin Sadak Yojana (PMGSY) and Members of Parliament Local Area Development Scheme (MPLADS) was allowed by the government a few years back. But even after this clubbing with other assets creating schemes, most of the funds sanctioned for MGNREGA is still spent in form of operating expenditure mostly unyielding works. And any economy needs support of assets in long term.

It is not that MGNREGA is altogether a bad scheme and cannot be utilized to long term benefits to the economy. It can easily be done by changing some of the features of the present form of this inclusive scheme. Government is required to make it compulsory that the fund of MGNREGA scheme is spent as wages to skilled, semi-skilled and unskilled labour only for infrastructure projects in every development block of every district. In this pursuit a prior annual plan of Prime Minister Gramin Sadak Yojana and MPLADS for regular employment opportunities can play vital role. This will not only provide income source to unprivileged sections of society but also help to build large numbers of infrastructures for civic as well as development purpose. This asset backed scheme will make MGNREGA not only desirable but economically viable and sustainable.


  • ET. (2019, October 31). Core sector output contracts sharply by 5.2 % in September. Retrieved from The Economic Times:
  • ET. (2019, August 23). Highlights of FM’s booster package for economy. Retrieved from The Economic Times:
  • Iyer, A. (2018, December 3). Agrarian crisis clear & present danger for Indian economy. Retrieved from livemint:
  • Mukherjee, W. (2019, August 15). There’s no slump in demand for phones and white goods. Retrieved from The Economic Times:
  • Upadhyay, R. K. (2014, August 25). Has India done it Right by not Ratifying WTO’s TFA? Retrieved from The Deliberation:
  • Upadhyay, R. K. (2015). Impact of Globalization on Distribution of Income, Poverty and Inequality in India. Abhinav-National Monthly Refereed Journal of Research in Commerce & Management, 38-44.
  • Upadhyay, R. K. (2019 a, August 25). Slowdown Creeps in Indian Economy. Retrieved from The Deliberation:
  • Upadhyay, R. K. (2019 b, October 21). Causes and the Nature of the Slowdown in the Indian Economy. Retrieved from The Deliberation:

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