MGNREGA policies and deterrence of development in rural India: An analytical approach

The paper offers two new insights in the context of the Mahatma Gandhi national rural employment guarantee act (MGNREGA) in India: first, we establish that migration of the skilled workers can occur under the MGNREGA scheme due to the low wage rate while the quality of work degrades as skilled workers migrate. As a result, we argue, only subsidies can offer a helpline in this regard. Secondly, this paper also argues that the political economy assumes critical importance for any welfare intervention like MGNREGA. We hence model the political economy of rural sector to explain why MGNREGA policies can fail. We show that, in situations where political parties and politicians can sequentially commit first to de facto (local) tax rates, and then levels and distribution of local public goods such as institutions and infrastructure, the political equilibrium is an underprovision equilibrium. In the underprovision equilibrium, the local government at the grass-root level of democracy chooses low tax rates (de facto) and offers inadequate local public goods, which can thus be an equilibrium outcome, which will in turn deter rural development through MGNREGA policies to eradicate rural poverty.