Can rural India be blamed for India's poor GDP?

The economic slowdown has been haunting India for quite a few quarters now. Sluggish industrial and construction activity, stalled projects and lack of reforms have all taken its toll. What has made matters worse is that inflation has remained consistently high. As a result of which the RBI does not have much headroom to lower rates even when growth is slow. Thus, it is quite apparent that India suffers from stagflation. The latter is a difficult economic situation where prices remain high even when growth slows down. 

The slowdown in growth has been due to a combination of factors cited above. But what has been the reason for the persistently high inflation? Firm food prices have certainly been one of the culprits. But that is not all. As per a report by Morgan Stanley and published on Firstbiz, rise in rural wages has also been a reason why overall prices are higher. And the government's populist National Rural Employment Guarantee Act (NREGA) has been blamed for this. 

The current UPA government has always been a staunch backer of the poor and rural sections of the society. That is why it introduced the NREGA scheme in 2005, which guarantees 100 days of employment to poor households in the rural areas. But this has led to a distortion in the labour market. This is largely because, while wages have risen, there has not really been much of a rise in productive assets. The NREGA in some sense has also created a shortage of labour in the rural market. Overall, the NREGA has led to a structural shift in the income consumption pattern and has artificially increased inflation labour and input costs. Without raising either productivity or focusing on asset creation, the NREGA has only managed to redistribute wealth rather than increase it. Meanwhile, the purchasing power of households has instead deteriorated an account of high inflation. This has then impacted demand and contributed to the slowdown of the Indian economy. 

The NREGA always had its share of detractors. And very rightly so. One of the arguments against such a scheme was that most people would take employment for granted and this attitude would gradually kill entrepreneurship and micro enterprises. Corruption seeping in was also another concern cited. 

If the NREGA has not really contributed to the growth of the economy, then the very purpose has been defeated. Just increasing wages without any subsequent increase in productivity ultimately is harmful to growth. Only the general elections and a new government at the helm will crucially decide the fate of NREGA and other such populist schemes going forward.