Understanding NREGA: A Simple Theory and Some Facts

A developing economy like India is often characterised by a labour market with demand and supply of labour and a wage that even if competitively determined may not be adequate for the poor household to reach their target income; what they consider as means of a decent living. Envisaging situations like these, the Indian government has implemented the National Rural Employment Guarantee Act (NREGA) in recent past, to complement the income of the poor by providing them employment for certain number of labour days in a year. In this paper, using a simple theoretical model, we have analysed the impact of NREGA scheme on (i) rural labour market, (ii) income of the poor households and (iii) overall agricultural production. It is seen that the income from NREGA alone can be a substantial part of the target income of the poor. We show that in such a situation, the poor may exhibit a backward bending supply curve of labour which may lead to an aggregate reduction in agricultural output. This adverse production effect can happen even when the NREGA activities lead to a moderate improvement in agricultural productivity. Data on food prices tend to support our finding to some extent.