COMMENTARY: Poverty Traps in Rural India: Why the NREGS Is Failing To Tackle Persistent Poverty

Hugh O’Reilly, University of Manchester

India is home to the largest public workfare program to ever exist. The National Rural Employment Guarantee Scheme (NREGS) employs between 21 and 55 million rural households every year and mandates employment as a legal right for adults. The aim is twofold: to serve as a safety net for the rural poor through employment insurance, particularly in the agricultural off-season, and to develop local infrastructure such as irrigation systems, roads, water networks, and environmental conservation.

In retrospect, public work programs are nothing new to India. Many 20th century relief schemes slowly evolved into long-term employment guarantees. Traveling  even further back into history, the ancient Indian polymath and royal advisor Chanakya (375-283 BCE) is documented as one of the first advocates of their use to address poverty.

So how has NREGS, the latest manifestation of workfare in India, fared after 17 years of operation, and should it be used by policymakers across the developing world as an example of an effective social safety net within rural contexts? Implementation of the scheme is a major feat in and of itself, but if it can’t alleviate rural poverty as effectively as alternate welfare policies, then it’s a suboptimal solution.

The scheme’s benefits are wide-ranging. The new source of employment has increased economic participation of minority groups (women, Scheduled Castes, and Scheduled Tribes) and reduced their dependency on landowners who control local monopsonies in agriculture. Market equilibrium wages for low-skill labor have also risen in real terms. Evidence shows that participants had higher consumption spending, improved food security, reduced anxiety, and increased savings. In some states, the infrastructure has increased agricultural productivity and reduced vulnerability to long-term climate risks. All of these outcomes have poverty-reducing effects. 

Yet the scheme does not exist without flaws. For years, it has received legitimate criticism for failing to guarantee employment. A 2021 study of administrative data demonstrated that less than 50% of households who want work were provided employment. Even for those who were provided employment, the average number of days allocated per household consistently falls far short of the 100 days per year aim. In addition, delayed income payments to participants are common, an issue worsened by the leakage of funds due to corrupt practices such as the over-reporting of work by public officials. Perhaps most concerning is the steady decline of project completion rates from 47% in 2007 to just 18% in 2018. This represents an increasingly large waste of resources, reducing the benefits for local communities and bringing into question whether an unconditional cash transfer could be more effective.

The existing evidence paints a mixed picture of positive outcomes for participants, underperformance of key indicators, and low value for money (due to leakage). My research adds to this evidence base from a relatively overlooked perspective: the impact of NREGS on asset ownership. Asset ownership is an important measure of living standards and is intrinsically linked to poverty. They provide individuals with the capability to perform basic tasks that are essential to achieving well-being and happiness. Asset ownership levels of a household also indicate their level of vulnerability to future poverty since using or selling assets is a common coping strategy when facing income shocks

Using nationally-representative data on over 10,000 households, I establish a difference-in-difference model with pre-treatment outcome matching to identify the impact of the scheme on the productive asset ownership of participants. The assets included are categorized as livestock, utilities/appliances, digital technology, and transport.

Over the duration of 7 years, I found that the scheme caused asset ownership of participants to increase by a modest 4.7%. Upon closer inspection, the average impact differs significantly for households depending on where they sit in relation to the poverty line (determined by consumption per capita and varying by state). Non-poor households had relatively large increases in asset ownership while there was no significant effect on the asset ownership levels of poor households. This was a surprising finding, given that the scheme was designed to help poorer households the most. Driven by curiosity, I looked to the wider literature to see if a possible explanation could be found.

The growing evidence of asset-based poverty traps in rural Asia, whereby structural constraints restrict poor households’ capacity to accumulate assets and escape poverty, supports my results both empirically and logically. Nashold (2012) models household asset dynamics in rural India and concludes the following:

“Structural immobility is pervasive. The currently poor are likely to remain poor, suggesting a structural poverty trap. While all households face static asset holdings, higher castes, larger landholders, and more educated households are significantly less likely to be poor.”

More recently, work by Balboni et al. (2021). which studies beneficiaries of a randomized asset transfer scheme over 11 years in rural Bangladesh, claims that:

“The data supports the poverty traps view—we identify a threshold level of initial assets above which households accumulate assets, take on better occupations, and grow out of poverty. The reverse happens for those below the threshold.”

One possible explanation for an asset-based poverty trap is founded upon poor households experiencing significant income variation on a monthly and annual basis, largely driven by the nature of informal work in agriculture and income shocks caused by extreme weather events. This limits households’ ability to plan ahead and also means that savings are relied upon for basic consumption in times of reduced income. As a result, long-term saving goals are not established or committed to, which keeps assets unaffordable and ownership low. This feeds back into itself, as low asset ownership reduces income-generating options, thereby increasing income dependency and variation.

Figure 2: Logic model of an asset-based poverty trap in rural India

While the NREGS was designed to guarantee employment, the data clearly shows that over half of households who apply are given employment for a short period of time or are not given any employment whatsoever. Therefore, the scheme fails to sufficiently reduce aggregate levels of income variation among rural households, which means that poor households are unable to escape poverty through saving and gradual asset accumulation.

Improvements are needed. But for this to happen, it must be acknowledged that the current state of NREGS does not guarantee employment sufficiently enough to tackle the asset-based poverty trap. More work needs to be available for those who need it, which means that more funding must reach the grassroots projects that generate employment. Solutions may lie in implementing new methods to reduce the administrative burden of the scheme or to cut down on the leakage of funds due to corruption. Significant strides have already been made to reduce these inefficiencies, but this must continue if the scheme is to guarantee employment.

As the most populated country on the planet, which has earned a profoundly unique and increasingly powerful position in global politics, the development of India is a necessity for the progression of humanity in the early 21st century. While the NREGS has been a pivotal source of empowerment for many rural laborers, improvements are needed to firmly consolidate the fundamental role it could have in India’s ongoing story of development. 

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