MNREGA Impact on Private Firms

MNREGA is the world’s largest public workfare programme. Research by ISB’s Shashwat Alok and Prasanna Tantri shows how it adversely affects India’s organised employment sector.

The world’s largest employment-guarantee programme, supporting around 50 million rural households, may have had an unintended consequence: drawing permanent workers away from organised employment in India.

The 2005 Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) was introduced to uplift India's rural poor. A study by ISB professors Shashwat Alok and Prasanna Tantri along with co-authors Sumit Agarwal and Yakshup Chopra, reveal its fallout--fewer permanent workers for private factories and a subsequent shift towards mechanisation.

Economists have long debated the repercussions of public workfare programmes on employment, poverty, consumption, and even crime. Yet, evidence on how these programmes affect firm-level outcomes, such as capital expenditure, productivity, and profitability, is limited. This study finds that MNREGA influences the supply of workers in the private sector, leading researchers to examine the response of firms to the resulting labour-supply shock.

What data tells about MNREGA’S economic shift

The MNREGA programme was rolled out in three phases. This phased implementation was leveraged by researchers for a comprehensive analysis using a generalised difference-in-differences method which covers multiple time periods and treatment groups. This approach helped separate the impact of MNREGA from other economic shocks, preventing misleading conclusions about employment cutbacks being caused by MNREGA.

The study mainly uses data from the Annual Survey of Industries (ASI), administered by the Government of India, which provides detailed data on worker demographics (contract, permanent, supervisory/managerial roles), person-hours worked, total wages, and benefits. Data on labour expenditure, ongoing and completed projects, and employment figures under the MNREGA were sourced from its official website.

The economic consequences of the programme were studied using three empirical approaches. Researchers looked at whether the MNREGA reduces the number of factory workers, and examined the reaction of firms to changes in labour supply, including variations in their responses. Later, they analysed how shifts in labour supply and the need for capital impact productivity.

When factories lose workers to MNREGA

Contrary to expectations that only temporary or contract workers may shift to MNREGA, the programme led to a 10% reduction in the supply of permanent workers to the private sector. In the context of this study, permanent workers are workers on factory payrolls. This decline was most evident in factories associated with low wages, low labour productivity, and high sales volatility.

For lower-wage workers, the welfare gains from working under MNREGA often exceed factory wages, leading them to resign from permanent jobs to participate in the programme. 

Workers were also reasonably confident in the programme’s longevity. While they may not always possess accurate political foresight, the history of Indian political economy indicates that such schemes typically outlive the governments that introduced them. 

The outcome of MNREGA for contract workers was complex, with opposing effects at play. Contract workers can split their time between MNREGA and private sector jobs. Therefore, while some may leave for MNREGA, new hires or former permanent workers might fill the gap.

Since the ASI, the primary source of industrial statistics pertaining to the organised sector in India, tracks employment as person-days without identifying individuals, it is difficult to separate these effects. Despite this, the total count of contract workers did not change. Additionally, given the nature of jobs, no direct impact on the demand or supply of managerial staff was detected. 

Fewer workers, more machines

The implementation of MNREGA did not lead to a change in wages. So, the decline in permanent workers by a lack of demand in factories is an unlikely outcome. 

While fewer workers might have led to higher wages, factories instead moved towards mechanisation, substituting capital for labour. This was more pronounced in factories paying lower wages, associated with low labour productivity, in states with pro-employer labour laws, and operating in more volatile industries.

According to the research, private firms increased their investments in machinery and equipment to maintain productivity in response to reduced worker availability. Investments in fixed assets rose by 12% and rent and lease expenses on plant machinery increased by 24.87%.

Effect on factory performance

The push towards mechanisation led to an 8% increase in production costs, but did not boost revenue, resulting in lesser earnings.

Overall, the impact of MNREGA on firm performance was found to be mixed. In the short term, firms experienced increased costs and reduced profitability due to mechanisation. However, despite these short-term declines in profitability, researchers suggested that MNREGA may enhance long-term profitability by improving operational efficiency. The study, however, does not explore these long-term effects due to limited data. 

Workfare programmes like MNREGA can inadvertently shrink the labour pool for private firms. While the ultimate gains for firms remain inconclusive, the immediate shift towards mechanisation reveals the complicated economic relationship triggered by large-scale public employment programmes like MNREGA on labour supply and corporate behaviour in India.

Author: ISB Editorial Team