Experts for rejig of MGNREGS

Scheme has contributed to high inflation

Thanks to the ‘MGNREGS’, rural wages have seen a “significant rise” during 2010-11, including even in some of the more vulnerable states like Orissa and Jaharkhand. But it has paradoxically contributed to the high inflation, dogging the Centre in the past two years.

Economic policy experts, discussing the fine print of the Reserve Bank of India’s (RBI) latest Annual Report at a meeting here recently, pointed out that the UPA’s rural job scheme was basically good as it had led to better employment rates. Yet, unwittingly, it was canalising the extra cash not to soften inflation, but to harden it.

These experts, who did not want to be named, made it clear that their effort to elucidate certain tricky issues was part of the RBI’s new, transparent public outreach policy under the advice of the present RBI Governor, D Subba Rao.

Stating that the “demand for currency was determined by several factors,” the experts said that one of them was the social sector expenditure by the government, which “particularly in rural areas due to MGNREGS, etc. also seems to have boosted demand for cash, particularly in 2008-09.”

But given the rise in petrol prices, this inflationary cycle was feeding on itself as ‘MGNREGS wages’ was indexed with the Wholesale Price Index (WPI).

On the other hand, the rising rural wages from the rural job scheme “also build into the Minimum Support Price (MSP) for crops”.

“This in turn adds to the food inflation,” in a vicious cycle, they explained.

A paradoxical fallout of this was that, as per latest available information, the savings of the household sector slipped to “9.70 per cent of the GDP in 2010-11 from 12.1 per cent in the previous year,” experts pointed out.

As the average rate of inflation was higher than the average rate on bank deposits, shrinking household savings reflected only that trend, they said, adding, in the overall scenario investments in assets-creating ‘capital expenditure’ was falling sharply.

The ‘gross domestic savings rate’ thus needs to be augmented to 37 per cent or more, they argued citing the report.

Another of the RBI’s paradoxical finding is large food stocks in FCI godowns co-existed with high food inflation. This was because, in recent years, with rising incomes, people’s consumption patterns was shifting from staple cereals to protein-rich high-value stuff like eggs, fish, meat, they said.

Amid this complex scenario, the RBI experts said that “reforms in the farm sector has to be more aggressive” if the desired 4 per cent growth rate in agriculture was to be achieved.