Does India’s welfare spending — MGNREGA, free rations, subsidies — impact growth?

What is a government for, if not to take care of its most vulnerable citizens? It is a question that deserves a serious answer. No state that ignores the poor has earned lasting legitimacy, and India’s poor have been ignored often enough to make the question urgent. When the government guarantees rural employment, subsidises food, and distributes direct transfers to hundreds of millions of households, it is trying to maintain legitimacy. But the real question is how should the government take care of its poor? 

Let’s start by distinguishing between two different kinds of need. For people who genuinely cannot participate in the economy — the severely disabled, the very elderly without family support, those wiped out by drought or disaster — a direct transfer is defensible. This is the legitimate, narrow core of welfare. But MGNREGA is different. It guarantees every rural household a hundred days of unskilled government work per year. The intention was to provide a safety net in bad times. What it has also done is raise the opportunity cost of moving toward more productive work. If a labourer can combine MGNREGA wages, subsidised rations, and other government transfers to make ends meet in their village, the pressure to relocate to an industrial town — unfamiliar, further from family, requiring new skills — is substantially reduced. MGNREGA is now being replaced with the Viksit Bharat Guarantee for Rozgar and Ajeevika Mission (Gramin), with a shift from demand-based to normative funding — capping total outreach rather than guaranteeing work to anyone who asks. But the problem of market distortion the scheme creates remains.

This shows up in a paradox. India is one of the world’s largest labour surplus economies. And yet manufacturers across the country consistently report that they cannot find enough workers at wages their productivity can support. Research shows that NREGA employment crowded out private employment roughly one for one in many states, raising rural wages in the off-season and making formal manufacturing recruitment harder. A labour surplus country with a labour shortage is not an accident. It is what happens when policy makes staying put more comfortable than moving up.

It is important to recognize that the government’s role is not to create jobs. It is to create the conditions under which private markets create jobs: the rule of law, regulations under which a workforce can be hired without prohibitive cost and retrained without legal warfare. Every rupee spent guaranteeing an unproductive day’s work is a rupee extracted from someone who would otherwise direct it toward productive activity.

We established earlier that achieving Viksit Bharat requires India to grow at 10 per cent or above for two decades. That kind of growth demands tens of millions of new productive private sector jobs — in manufacturing, in services, in industries India has not yet built at scale. Those jobs will not come from a government employment scheme. They will come from the conditions that make it worth building a factory, hiring a worker, and competing with the world.