The impact of Rs. 2/kg rice
In the supplement of yesterday’s The New Indian Express (one of the six articles is here: http://epaper.expressbuzz.com/NE/NE/2009/07/12/ArticleHtmls/12_07_2009_412_002.shtml?Mode=1), it was argued about how the combination of NREGS and cheap rice (most states provide or promise to provide 25 kg of rice per month per poor family at Rs. 2 per kg) is destroying the rural economy.
One day of work under the NREGS gives a person Rs. 100. Half of that will go into buying rice for his family for the ENTIRE MONTH. Extending this argument, twelve days of work under the NREGS will feed his family for the whole year. Given that the staple is taken care of,, there is little incentive for the villager to work to earn more. And so there is a severe shortage of farm labourers, other rural workers, etc.
When the NREGS came about, some people applauded it saying that it would ensure that minimum wage laws would now be met. Given that people were now assured of a certain sum (say Rs. 100 per day) for doing meaningless stuff like digging and filling holes, they would go to do other harder and more meaningful work only if they were paid more (and you need to take into account that “real work” takes more discipline, hard work, etc. than it takes to wrok for a welfare program – so the NREGS actually pushed up the minimum wage for farm labour to much higher than Rs. 100).
Now, with various states coming up with cheap rice schemes, the whole thing has gone topsy turvy. Given the subsidized rice, it is now possible for the worker to earn enough for his staple food by just doing a few days of work under the NREGS! The only need for him to work elsewhere, and possibly harder, is to pay for his “luxuries” (considering the price of subsidized rice, requirements and NREGS pay, it can be shown that 100 days of NREGS work can pay for all the essentials).
Given that the essentials are taken care of by the combination of NREGS and cheap rice, the only reason that the worker will need to do actual (i.e. non-NREGS) is to help him save, or for “luxuries”. Yes, some workers will have special needs for money at different points of time because of which they will take on the extra work, but if you aggregate the supply of work, you will realize that the ‘hurdle daily rate’ for the worker to accept “real work” becomes really high.
Since the worker doesn’t absolutely need the money, he can now become the price-setter in the job market rather than being a price-taker. So what this effectively does is to push the “minimum non-NREGS wage” really high indeed (I can’t intuitively put a number on it, but it could be as much as Rs. 200). My bet is that a lot of rural-economy-produced goods will turn out to be really expensive next year since a lot of producers might choose not to produce them given the high cost of labour.
Quite a few commentators have said that the NREGS is a noble scheme for empowering the poor, and given that most of the ‘work’ done is meaningless, it can be replaced by simple cash transfers. The problem is that if that is combined with yet another welfare measure such as cheap rice, it can create severe distortions in the market.
The moral of the story is that if you want to help the poor, please go ahead and do so. What you shouldn’t do is to help them twice over – that can result in severe market distortions like the one that the express article talks about. What is needed is greater coordination between the centre and the states in the welfare measures.
huh. everything non-rice is not necessarily a luxury. If these people covered under the NREGS are holding out for better wages, it may just mean that Rs.40 is an abysmally low min wage in the country (which it is). It may just mean that the price of rural-economy-produced goods is currently unrealistically low (which it is – I recently bought a beautiful hand-decorated hand-made paper fan in Hyderabad for Rs.5, cheaper than a cup of coffee or parking in IMAX or a movie ticket. The fan must’ve taken at least 30-60 minutes for one person working exclusively on it to make – and should’ve legitimately been much, much more expensive than a cup of coffee. It’s only in India than hand-made products are cheaper than machine-made equivalent products, and that’s a totally skewed system). So the combination of pricing rice low and allowing these currently un-employed people the luxury to hold out for better wages will improve their standard of living immensely, while correcting prices negligibly or slightly at the end consumer. Pareto-optimal if you ask me!
Either way, the philosophy that people must be and remain desperate to work has been disproven many, many times over through different cultures and through history. If they’re holding out for better wages it’s not because they’re lazy/demanding but because their current circumstances are truly dire and they’re moving not just towards acquiring ‘luxury items’ like dal, vegetables and basic clothes in addition to rice, it’s because they’re finally getting to the ‘luxury of choice’. The average IIM grad doesn’t stop working after 6 months since (s)he has now accumulated enough money to feed hirself for the next ten years – why would the average NREGS-covered person stop working in similar circumstances? The same philosophy of always wanting a better life, always keeping up with their peers ‘the Joneses’, will come into play, typical human competitive spirit, etc.
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skimpy Reply:
August 2nd, 2009 at 1:35 pm
you assume that cost and price are related. they are uncorrelate. price depends on deman and supply, and cost of making only impacts it by impacting supply. if you spend 1000 hours making something and there’s no demand, happy birthday
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Chevalier Reply:
August 7th, 2009 at 1:28 am
You’re naive if you think in the real world that cost and price are not correlated – that’s only in ideal-state microeconomics textbooks. And even in the ideal-state scenarios, any industry will eventually have a steady, constant, small *margin*, (not profit $) i.e. price will eventually be cost + C.
And the point of my whole comment was how having a little extra money enables rural India to raise prices of their goods and services by allowing them a little more leeway in reducing supply and increasing demand of their services & products, e.g. by better marketing, better logistics, industry consolidation, technology, etc. That’s the same luxury that the manufactures of IMAX movies, shopping malls, overpriced perfumes and parking areas have had through these many decades around the world – and it’s a good thing for everybody that this is happening.
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This might be true if we assume the worker gets enough days of work under the NREGS.(The govt gives a guarantee of 100 days).But sadly they don’t.
It’s totally dependent on the village head (pradhan) who usually executes the project in a village.High degree of nepotism combined with the sumbissive nature of villagers makes it easy for the pradhan to manipulate the scheme.
Even if the villagers are willing to work under the scheme, more often than not they don’t get the work.
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skimpy Reply:
August 2nd, 2009 at 1:36 pm
see NREGS was meant to be an insurance scheme for villagers who don’t get other work.
I agree with you that not everyone gets 100 days of work. but combine this scheme with cheap rice and even 50 days of work will create enough slack in the villager’s pocket
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Agree with Chevalier. The notion that NREGS gives people enough money to buy rice and other essential commodities and hence they will stop working is flawed. All it means is other businesses will have to pay more than what they are currently paying, which is not a bad thing.
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skimpy Reply:
August 2nd, 2009 at 1:37 pm
it’s a bad thing for the other businesses
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Welcome back to econ-blogging Wimpsir!
Have some doubts about the article though. Firstly, why is it obvious that all (or a substantial amount) NREG work is non-essential? Are we really that developed that we can not create enough useful projects that can benefit from it?
Secondly, I just finished reading Harford’s book (on your recco
), where he argues that one of the reasons for China’s boom was that the government froze targets for factories, which could then use the extra available resources to make profit. Why would a similar scenario not apply to the Indian farmers (in the sense that they now are guaranteed a minimum livelihood, and have days where they are no longer concerned to make ends meet and so can earn money for other purposes). Why does it follow that other rural wages must rise? Are you essentially arguing that the Indian rural population, compared to the Chinese, is lazy and not incentivized to make more money?
I guess your argument is more about how to efficiently implement NREG, which I admit seems a difficult problem (although it looks like the govt are putting some fight). Your present argument seems a bit too simplistic though…
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skimpy Reply:
August 2nd, 2009 at 1:39 pm
firstly:
there is a rule in the NREGA that non-salary expenses under the scheme are to be minimized. which means no machinery, no assembly lines and lots of manual work.
yes, there is enough and more work to be done, but unfortunately the strong regulations mean that the scheme can’t be used for that.
secondly:
the TNIE article argues that – that there’s no incentive to make more money. and i pick it up from there and say that since essentials are taken care of, and a certain lifestyle has been used to, inertia are there to work more to earn more.
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So you mean to say if I get a XYZ LPA pay package, i will stop working for n number of years ? merely because my ‘basic necessities’ are met, for the next n years?
Not that 2 Rs rice is desired, but subsidies are like bad habits, once cultivated they become a necessity, once they become a necessity they transform into basic amenities… one of the ways to solve the problem is to eliminate the bad habit, slowly(no other choice because they are{subsidy} already basic amenities to a lot of people)
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skimpy Reply:
August 2nd, 2009 at 1:40 pm
agree. you talk about subsidy. the problem here is about double subsidy – NREG + cheap rice
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Well, I have not analyzed this much from the econ perspective; but what I noticed is that, because rice is available for just Rs.2, rest of the money finds its way to liquor/toddy shops. That is the sad part
Just doling out money by means of these schemes does not help much, spreading some awareness about expending it wisely for good cause helps.
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July 19th, 2009 at 3:50 pm