India File: Modi revamps landmark rural job scheme, drawing flak

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Jan 13 - By Ira Dugal, Editor Financial News, with global Reuters staff

India has overhauled a cornerstone of its social safety net, prompting stiff resistance. The changes to the two-decade-old rural jobs programme, an anti-poverty initiative that aims to keep demand afloat during economic stress, have sparked political pushback and condemnation from economists.

Could the revamp leave the economy more exposed to shocks? That's our focus this week. Write to us with your views at ira.dugal@thomsonreuters.com

And, the Indian government seeks unprecedented powers over smartphone makers. Scroll down for a Reuters exclusive report.

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A BUFFER FOR VULNERABLE WORKERS

Prime Minister Narendra Modi’s move to redesign India’s flagship rural jobs programme has sparked resistance from opposition parties and drawn criticism from global economists, who warn the changes could weaken a crucial buffer for millions of vulnerable workers during economic downturns.

The Mahatma Gandhi National Rural Employment Guarantee Act, or MGNREGA, has functioned for nearly two decades as the world’s largest public employment programme, guaranteeing rural households up to 100 days of work a year at a fixed wage.

It stabilised incomes in a country where about two-thirds of the 1.4 billion people live in rural areas and where seasonal farming provides subsistence to nearly half of the population.

In December, Modi’s government unexpectedly announced changes - renaming the scheme, lifting the work guarantee to 125 days, and shifting a larger share of the funding burden to states while tightening federal control over its operation.

The government said the change was to align the scheme with its goal of making India a developed economy by 2047, the centenary of independence from Britain.

But critics argue the new design, rushed through the Indian Parliament without much debate, risks weakening a programme that has acted as an economic shock absorber, most recently cushioning migrant workers during the COVID-19 pandemic as jobs in cities dried up.

The change also pushes a much larger share of the cost of the programme onto fiscally stretched states, whose record borrowings have riled domestic bond markets.

A December-19-dated letter co-authored by economists including Joseph Stiglitz and Thomas Piketty warned the changes could threaten the scheme’s very existence.

WHY THE TIMING MATTERS

Over the past decade, the cost of the job guarantee scheme has risen sharply. In the last two decades, the government has spent 9.95 trillion rupees ($110.29 billion) on the programme, with about 80% of this coming in the past decade, Soumya Kanti Ghosh, chief economist at State Bank of India, said.

In the current financial year, the federal government allocated 860 billion rupees ($9.53 billion) for it. The revamp will force 40% of that cost onto states compared to 10% earlier. It will also ask states to bear 100% of the cost if funding required goes beyond an initially planned allocation.

Until now, the Act required the centre to increase allocations in line with demand, irrespective of an overshoot of any budgets.

"States lack the central government’s financial capacity," Stiglitz, Piketty and other economists wrote.

"The new funding pattern creates a catastrophic Catch-22," they said, adding that poorer states will curb project approvals, stifling the availability of work where it is needed most.

India's official unemployment rate is low at 4.4% in rural areas but a decline in the availability of work under the job guarantee scheme could push up unemployment or push more workers to the farms, putting pressure on incomes.

The revamp is also coming at a time when the federal government has brought its finances under control, with its annual fiscal deficit targeted at 4.4% of GDP in the financial year ending March 31, 2026. It was more than double that in the year after the pandemic.

But state finances are looking stretched. Read this previous edition of the India File to know why.

The added burden of funding the job guarantee scheme will worsen these pressures, according to Madhavi Arora, chief economist at Mumbai-based brokerage Emkay Global Financial Services, who said the deficit for states is tracking 3.4% for the ongoing financial year.

To be sure, over the years, agencies including the country’s top audit institution have flagged leakages and implementation concerns in the scheme.

SBI's Ghosh said the revamp seeks to tackle some of these concerns.

"The scheme is increasingly transitioning from a purely demand-driven framework towards one that emphasises outcomes, accountability and responsiveness to local needs," said Ghosh, adding that the increase in work guarantee to 125 days means the federal government will continue to spend on providing this backstop, with states supplementing it.

THIS WEEK'S MUST-READ

India is proposing that smartphone makers be required to share source code with the government, a step tech companies say lacks any global precedent.

The plan, India says, is part of efforts to boost security of user data as online fraud and data breaches surge.

Read the Reuters exclusive here.

The proposal is among 83 security standards being suggested, many of which are facing pushback from firms such as Apple AAPL.O and Samsung Elec 005930.KS. Click here for the key proposals.

MARKET MATTERS

Shares of billionaire Mukesh Ambani's Reliance Industries RELI.NS suffered last week their worst weekly drop in more than a year as geopolitical tensions rose and a U.S.-India trade deal remained elusive.

Reliance said it does not expect any deliveries of Russian crude in January, amid continued scrutiny of India's oil purchases from Russia.

It also said it will only purchase Venezuelan oil if the U.S. permits it to.

Reliance reports quarterly earnings this week, where analysts continue to watch for an update on its oil and gas business and on planned public offerings of its telecom and retail units.

Its Jio Platforms unit will look to float 2.5% of the company in what could be India's largest-ever IPO.

($1 = 90.2150 Indian rupees)

(Reporting by Ira Dugal; Editing by Muralikumar Anantharaman)

((Ira.Dugal@thomsonreuters.com; +91-9833024892;))