The Mahatma Gandhi National Rural Employment Guarantee Act provides for the biggest welfare spending scheme by the Government of India. A pre-announced wage rate is paid under the scheme for labour performed in creating assets. The wage rate varies from state to state, depending upon prevailing labour market conditions. The recent revision in wages under the scheme for 2022-23 shows the MGNREGA wage rate to be below the minimum wage for similar unskilled work in almost every state. There has been an additional announcement that fresh grants under the scheme released for each state would be done only after the completion of an audit to check the money utilized and the work done. The official reason cited for this gap relates to viewing MGNREGA jobs as being sought as a last resort when regular jobs are unavailable. The Centre does not want people to become dependent on the MGNREGA. The idea is not to make MGNREGA jobs the most preferred. The audit requirement is obvious and justified on the grounds of preventing the misuse of funds.

These announcements will have implications for states and their labour markets. First, consider the wage gap. In tight labour markets, say, in Maharashtra or Kerala, the actual wage rate, as opposed to the minimum, will tend to increase. However, this natural rise will be tempered by the existence of a de facto minimum wage, which is the MGNREGA wage rate. In other words, rising wage rates will compel employers to hold on to wages as much as possible by forcing labour to fall back on the MGNREGA. In weak labour markets, the state’s minimum wage would come under pressure to be reduced further as the opportunity cost of workers would be the MGNREGA wage rate, a trend that would reduce the wage gap. In both cases, the average rural wage would be lower than what it would have been if the wage gap had not been there. The second implication is about the auditing of funds and performance. While this is laudable in ensuring that public funds are not wasted, it might also create a conflict of political interests in a federal system. States with Opposition governments might feel that the audit process is slow and too complicated, thereby leading to a delay in the release of the next round of funds. States that misuse funds or are terribly inefficient in their use ought to be hauled up. It is not clear that such identification of the laggards would be done in an acceptable fashion. The increase in political quibbling would have its own economic costs.