As MGNREGS is repealed by the Government, there has been widespread concern about its replacement. The replacement is objectively inferior. It puts unnecessary strain on the non-sovereign state governments, which will be forced to cut back on spending elsewhere, as they are not sovereign currency issuers. Additionally, the budget is no longer floating, the guarantee is no longer a guarantee, the replacement program can be paused at any time the Government pleases, and the regions where the program is available are notified by the Government. There have been several articles on why MGNREGS was objectively good:
- https://thewire.in/rights/workers-and-economists-protest-as-government-sounds-mgnregas-death-knell
- https://www.levyinstitute.org/an-open-letter-to-the-indian-government-in-support-of-mgnrega/
In this blog, however, I wish to go into the reasons why the Government repealed this bill, or at least their own reasoning and some of my thoughts on it. Since the imposition of high tariffs on Indian goods by Donald Trump, all developing countries have been fighting among one another to maintain their export sectors. Of course, with a floating exchange rate, depreciation is one mode of adjustment. However, depreciation has two sides. While it can cheapen exports, it also increases import costs, which reduces competitiveness. The end result of this is not clear. This is why governments around the world, including India, have been pursuing internal devaluation, basically paying workers less so capitalists get more profits and increase external competitiveness. This is a strategy that is devastating for the economy. In my previous blog, I discussed how India and the rest of the developing world will find it very difficult to compete with the industrial capacity of China, as its trade surplus just hit $1 trillion.
Two recent policies by the Indian Government make it clear to me that they are following an internal devaluation strategy. First, the implementation of labour law “reforms” that were on hold for the past five years. Second, the recent repeal of MGNREGS. The intention of both these “reforms” is to reduce unit labour costs, that is, the share of output going to labour rather than capital. This will compress domestic demand and make the economy appear more competitive externally.
But the reality is quite complicated. It is workers’ consumption that results in profits in the first place. If you cut spending, workers will have less income to spend. The “hope” is that this will be compensated by growth in exports and by the local currency remaining stable against the dollar.
For most workers, however, this will manifest as lower wages and higher unemployment or underemployment.
The purpose of MGNREGS was to provide a rural wage floor. One might claim that minimum wages exist, but as long as involuntary unemployment exists, the minimum wage is de facto zero. MGNREGS ensured that the wage floor was the one set by the state, at least to some extent, since the duration of work was limited.
All this is gone with the new program being more discretionary. The wage floor has been weakened, and capitalists will now get to enjoy cheaper labour costs. It will also promote more migration from rural to urban areas in search of jobs, which is something capitalists have long wanted.
MGNREGS was also a strong automatic stabilizer. An automatic stabilizer is a program whose spending rises as the economy weakens and falls as the economy strengthens. In other words, it is countercyclical. MGNREGS was one such program since it provided fallback income for workers who lost jobs in rural areas. It replaced lost income and provided a demand floor. This is now gone. Taking a sectoral balances approach, with the centre and states split out:
Central Government Balance + State Government Balance + Private Balance + Current Account Balance = 0
Let us say that actual MGNREGS spending was ₹85,000 crore. That ₹85,000 crore represented a deficit for the Central Government and a surplus for the private sector, where the private sector refers to everyone except the government and the external sector.
Now, under the new program, spending falls to ₹40,000 crore. That is a reduction of ₹45,000 crore from the hands of the private sector. It is a loss of income. But what about state governments? Would they not pay for it? State governments cannot create money. They are not sovereign issuers. They can redistribute existing money, but their capacity to tax is limited politically and legally. They can only borrow so much from commercial banks and the public before debt servicing becomes precarious. Thus, the reduction in spending will not be made up by state governments running larger deficits. Instead, they will simply cut total spending to meet their financial constraints.
The repeal of MGNREGS, and the way it was financed, is a severe loss for the country and will likely reduce domestic demand. On the other hand, some capitalists may profit significantly, while the rest of the world will receive cheaper Indian goods due to lower wages. This is devastating.
That is all.