Atanu Dey On India's Development

Old Story: NREGA Causes Inflation

| 12 Comments

Just thought that an old post from over three years ago in Jan 2008 is worth revisiting since it appears that some idiots people in India are waking up finally to the truth of how NREGA causes inflation. “Does the NREGS Cause Inflation?

Inflation happens when the total amount of money increases relative to the total amount of goods that are produced in the economy. If a scheme merely adds more money to the pot without increasing production, it will cause inflation. If you increase production and at the same time increase the total amount of money appropriately, there is no inflation.

If you do a pure income transfer, without raising the total amount of money, you do not have inflation.

So what is the NREGS doing? If it is merely printing money and handing it to unemployed people (who are not producing anything), then it leads to inflation. This inflation reduces the real incomes of people who are producing something. So in this case, it is a pure income redistribution scheme. Drèze knows this as he knows basic economics. But he cannot admit the truth because his job depends on being economical with the truth.

  • http://contemplationist.wordpress.com Contemplationist

    This is a metaphysical issue. But, it doesn’t matter.
    Bottom line = NREGA is a horrible, awful, no-good scheme that needs to be scrapped. Thats it. It “causes” inflation only cos the RBI prints Rupees to “accommodate” it.

  • Sridhar

    Could the reverse not be true? That the governments are not taxing the individuals and businesses enough? I personally think that the level of economic growth that we witness today allows for such cash transfers. Conditional cash transfers would even be better. My problem with NREGA is about the govts calling cash transfers as ‘wages’ and fooling everyone around.

  • gaurav khandelwal

    UPA calls NREGA as their flagship programme,
    workwout needs to be done to restructure the scheme

  • RC

    NREGA is pretty much a program like the free-TV, free-blender, free-whatever program of bribing the electorate and essentially trying to buy votes.

    This is the exact scenario for which Milton Friedman had said: ” Why dont you give them spoons, it will create more jobs ” (This was said by him upon seeing a “jobs” program where people were using shovels and pick axes to dig ditches)

    One needs to understand that creating “jobs” does not automatically mean creating wealth. Only increase in productivity will lead to wealth creation. Per yeh socialists ko kaun samazayega??

  • Mayur Fernandes

    Another facet thats not fully explored is the distortion in labour markets. There’s already stories of how manual labour for construction, security, hospitality is hard to come by in the big cities as a lot of the labour force stays in villages and collects the NREGA paychecks. Seems like it’s a shift of labour from more productive to less productive parts of the economy. Wish someone would do a more detailed study of this.

  • maaran

    NREGA is evil & causes lot of problems. No questions. But Inflation is not one of them. Inflation is caused by the institution called the central bank & its interventions in the money supply.

  • http://themmindset.wordpress.com/ The Mindset

    You cannot fill a bucket if it has a hole in the bottom.
    The rate at which India’s population is increasing no government policy is going to work.

    Now its time that the government of India adopt Single Child policy like China

    Atleast they should learn something from others

  • pravin

    hey Mindset
    utterly ridiculous.the problem of population exists because socialists expect maai baap sarkar to loot from the productive to provide for the vote bank.human resources are not a burden on earth.china is going to have a hard landing demographically because it will age prematurely.population is a blessing,unless you are a central planning statist.

  • Karan

    It is interesting how so many here have simply dismissed NREGA as evil, and unproductive. If you travel on the ground in Rajasthan and other states where NREGA has been implemented, you can see that it is doing tremendous things for the rural infrastructure. Those poor people have decent facilities in their village now, and as their living conditions improve, it can be expected that revenue generation from these places will go up, driving up growth in a sustainable rate. If you are looking at China for example, you should see what mass migration of adults to cities to work in factories is doing to Chinese families and their people in general. Western Europe, which is model for developed economies, has massive socialist programmes. Right now they are the top countries innovating in sciences and so many other areas, and the USA is falling behind. The idea is not to give away stuff for free, but to free people from shackles of poverty so that they too can contribute constructively in a growing economy and keep the growth sustainable.

  • RC

    One more on example of reporting showing the destructive effects of NREGA. Reuters story reporting farmer having to pay very high to workers and still facing shortage
    The resulting higher inflation is an ECON 101 thing!! Only communists dont get it.
    But as long as naive and ideological educated class does not understand this basic facts, India climbing its way out of poverty is impossible.

  • Piyush Ranjan

    NREGA may be one of fuels of inflation. However, there is nothing wrong in that. Poor people should get protection from inflation. Others like you and me need to face reality of today. You cannot hide behind inflation as a reason to not develop the country.

  • Nitin

    I am totally agree with your statement, but only NREGA is not a single cause for increase of the price but on the other side we have also look to the effect of VI pay commission and MNC’s effects on it . If the scheme like NREGA give the right to earn the money for the rural India is a good for India economy as well the the rural India. it will reduce the gap of income level and they get their right.