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Urgent Release: My Special Report on How to Trade the Coronavirus Crash

Is this government scheme killing rural jobs in India?

Feb 28, 2012

In this issue:
» CVs take the cake in 9mFY12
» What a shrinking conglomerate discount means
» Delisting for MNCs is getting expensive
» Should the US continue to head the World Bank?
» ...and more!

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00:00
 
The National Rural Employment Guarantee Act (NREGA) brought into force in 2005 was considered a historic landmark for the UPA government. The aim of this act was to remove poverty by assuring at least 100 days employment. This to every rural household in which adult members volunteered to do unskilled manual work. At that time, certain issues were raised. These included the ability of the government to fund such a scheme given the state of its finances and the possibility of rampant corruption creeping in.

Almost eight years later, many of these concerns still remain and some more have come to the fore. The scheme has been attacked for many reasons. Some of these are bloating rural wages, corruption, lack of asset creation for money spent, and making farming uneconomic. But the real problem is that the scheme may be destroying the work ethic and jobs in general. According to a research paper by the Indian School of Business (ISB), the scheme has done its bit to alleviate poverty. But it is also raising people's dependence on government and killing off micro enterprises. The data provided by the National Sample Survey Office also paints a telling picture. Between 1999-00, there were 92 m small jobs created. This figure stood at a paltry 2.2 m between 2004-05 and 2009-10. Not just that, during the latter period, there were 27.7 m new jobs created, which was offset by a drop of 25.5 m in the self employed.

Is this such a bad sign? After all, the drop could partly be explained by more people pursuing higher education. Or more women dropping out of the workforce altogether. Also, people cannot be blamed for opting to quit tough farming jobs for employment under the NREGA. This then raises the question whether jobs under the NREGA are productive in the first place. Are they adding much to the growth of the economy? With corruption ruling the roost, one would hardly surprised if many are getting paid without doing any work at all.

The government's intention behind this scheme to eradicate poverty can be appreciated. But maybe it is time now for the same to undergo a serious overhaul. Already the government's finances are under tremendous pressure. Thus, allocating vast sums of money to schemes which are not contributing much to the overall economic growth and improvement in standard of living does not bode well in the long run.

Do you think the NREGA has done a good job in reducing poverty in India? If so, do you invest on the basis of their fundamental strength or go by the movement in prices? Share your comments with us or post your views on our Facebook page / Google+ page.

01:26
 Chart of the day
 
The Indian auto industry has faced many headwinds in FY12 so far such as high interest rates and fuel prices impacting demand and rising raw material costs. But certain segments in the industry still managed to do better than the others. Today's chart of the day shows that CVs performed the best in 9mFY12, while passenger vehicles volume growth lagged far behind. Besides the above mentioned factors, the other reason why the latter did not do well was the strike at Marut's Manesar plant. Had it not been for the impressive growth in utility vehicles (UVs), the performance of passenger vehicles in total would have been quite poor. Commerical vehicles put up a strong show despite industrial growth slowing down.

Data Source: SIAM

02:01
 
Five years could be worth a lifetime in a lot of instances. But in the business world, it is nothing but a small blip we think. Thus, when a sweeping conclusion is made after studying just a five-year trend, the conclusion does need some serious re-consideration. And this is what exactly needs to be done in the case of a study done by the Boston Consulting Group. The study has concluded that big conglomerates are returning to favour as the conglomerate discount shrank from 10% to a little over 7% between 2005 and 2009.

Conglomerate discount is nothing but a discount that is given to the share price of conglomerate companies as opposed to smaller, more focused companies. This is because the latter are believed to be more nimble, more transparent and easier to compare with peers. The whole study is rather redundant we believe. For valuations depend on factors like competitive advantages and the management of the firms. The fact that a firm is a conglomerate or a standalone entity does not really matter. As long as it will continue to create value for shareholders, growth in stock price will follow. The rest should be discarded as mere noise as per us.

02:36
 
Not wanting to share a pie of profits in the subsidiaries is something that multi-national (MNC) giants are known for. The likes of Reckitt Benckiser, Cadbury, Philips, Panasonic, Ray Ban, Otis and Carrier have proven that in the past by delisting from Indian exchanges. However, going forward, delisting themselves from Indian bourses may cost the entities dearly. As per an article in a business daily, the affair is set to be an expensive one. Especially, with the stock prices of companies proposing delisting going through the roof. In several cases, the delisting could cost as much as 10 years of accumulated profits. Hence this may cause several of the entities to rethink their decision. FDI rules not longer make listing mandatory for MNCs. However for the policies to remain in their favour, many entities may find it profitable to have deeper roots in Indian financial markets.

03:01
 
The leading provider of grants and loans to the poorer countries is all set to see a change in leadership. This time around, the emerging markets hope to put one of their own in the top position as head of World Bank. Till date this position has been dominated by the United States. And for a very good reason too. US is the largest shareholder in the World Bank. Naturally, the position of the chief goes to them. But the emerging markets have argued that they too could represent their position as a statement of their growing strength in the global economy. They are also confident that the more liberal Obama government will support them as the former has stated several times the need for change at global institutions. However, the bigger problem they face is who to elect for this position. The emerging markets do not really have much unity as a block. Therefore reaching a unanimous decision on any one person may be difficult. That said, it is not that there is a dearth of suitable candidates in the region. But would any one of them finally make it to the top? Only time will tell.

03:41
 
We are yet not out of the woods when it comes to the global financial crisis. We are not seeing widespread bank failures this time, the likes of Lehman Brothers or Merrill Lynch. But we may soon see widespread downgrades if Moody's has its way . The rating agency warned that it may cut credit ratings of 17 global and 114 European financial institutions. This is another sign that the euro zone debt crisis is spreading like wildfire across the global financial system. A weak funding environment, increased regulatory pressures and a tougher economic environment is making life difficult for many global financial firms.

A number of big names in the banking space such as UBS, Credit Suisse and Morgan Stanley could see their long term credit ratings drop by three notches. Barclays, BNP Paribas, Deutsche Bank, Goldman Sachs, etc could see a two notch drop. Out of the 114 European financial institutions being downgraded a number of them are in Italy and Spain. A few are in France and Germany as well. Investors and companies alike are paying heavily for Government excesses. And there seems to be no end in sight or no real solution in the offing.

04:15
 
Last year in the month of August, Dr Manmohan Singh, the Prime Minister of India, stated that India is well-positioned to emerge as the world's third largest economy by 2025. Recently, the global energy giant BP plc corroborated the same view. However, it expects this to happen by 2030. In the Energy outlook 2030, BP plc states that India would be the third largest energy consumer as well by 2030. Good point is that the yearly energy demand growth is expected to slow down to 4.5%. This would happen on the back of improvements in energy efficiency. The average energy demand growth was 5.5% during 1999-2010. BP plc also expects that while share of industry would grow in the total GDP (Gross Domestic Product), services would continue to have a higher share of GDP.

No doubt, India has potential to become the third largest economy in the next two decades. However, all this definitely calls for an agile and proactive leadership at the centre. Without this, it may take longer than the set timeline.

04:47
 
In the meanwhile, the Indian stock markets hovered above the dotted line throughout today's trade. This was mainly led by positive cues from Asia. At the time of writing, BSE Sensex was up by 255 points (1.5%). However, IT stocks bucked the trend and were down by 0.5%. Among the Asian stock markets, Malaysia was the only loser.

04:56
  Today's Investing Mantra
"Stock speculation is largely a matter of A trying to decide what B, C and D are likely to think-with B, C and D trying to do the same." - Benjamin Graham

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Equitymaster requests your view! Post a comment on "Is this government scheme killing rural jobs in India?". Click here!

29 Responses to "Is this government scheme killing rural jobs in India?"

HARSHAD PANDYA

Apr 6, 2013

NREGA HAS DONE VERY BAD JOB IN REDUCING POVERTY IN INDIA.INSTED OF THAT REQUIRE PROGRAM OF FREE EDUACATION TO ALL INDIAN STUDENTS UPTO GRADUATION.REFER MY PETITION ON CHANGE.ORG AND FILE YOUR PETITION.THANKS.

Like 

Madhav Pande

Apr 25, 2012

Be it as it may but it has empowered and added bargaining power to the very poor man who was so far exploited by the Zamindars and large farmers. Therefore the scheme is doing good. If there are any lacuane those need to be corrected as we go along. Experts can do further socio eco. research of the scheme and suggest improvements.

Like 

Ragini Ghanekar

Mar 20, 2012

It is true that such schemes are making rural farming uneconomic. Such scheme should not be seen as a charity. It should have counter checks and cross checks in place before they are launched. they should be productive and an asset should be created which will help to create further asset creation and continue the chain. But our leaders do not have any long term view in these matters or care about real prosperity of the nation. They are only after populist measures and vote bank politics. Probably they do not have a vision at all like Mamata Banergy who has guts to sack her own minister for doing something right just to satisfy her ego and not having such a vision herself. Our political field is full of such people along with goondas. True talents do not enter politics. That is tragedy of democracy.

Like 

DHAWAL AMAR SINGH

Mar 2, 2012

The basic management principle to manage the projects is totally absent under the Act. The Central Government is providing the funds and has no control to monitor for its effective implementation. The results are bound to increase corruption and direct loss to the country. Unfortunately, there seems to no means to assess the expenditure against the out put achieved in terms of money. In case, this money is spent to increase the irrigation and other means to achieve the higher out put from the fields would help the increase of growth rate in the agriculture, thereby making the population self dependent rather to make them to depend up on the Government Tax collected money every year for living by working 100 days. Thus, we are making the nation lazy and more dependent of the government money. An extremely discouraging approach in the long run and only beneficial for the seeking votes.

Like 

saarat paalt

Mar 1, 2012

The scheme is nothing but an eye wash. The scheme is to provide employment for 100 days in a year. What about the rest of the days? Where these people will go? All of us are very clear of the condition of agriculture sector. One of the main reason for lower productivity in this sector is non availablity of labour. Why can't we divert these labour force to there. Employment for employment and the production also increase. On top of that the Government which is already burdened with fiscal deficit and subsidies could save a lot. As it stands it is a sheer waste of money.

Like 

Georgy

Mar 1, 2012

I do not understand why the planner's of India cannot see through the defects in a scheme. I fully agree with the article regarding NREGA. The most indirect ill effect will be the EROSION OF WORK CULTURE in the soceity. All jobs has its difficulties - if farm labour is strenuous, it will fetch you good health physically. Office job has got its quota of tension leading to hypertension and diabetics. Also this scheme is generating a lot of corruption.

Like 

S.K.Damani

Feb 29, 2012

I have read all the reviews given above AND FULLY AGREE with them. NREGA is nothing but the biggest scam, may be bigger than the 2G & g scams of Raja. Worst it has made the rural folks absolutely lazy and just not interested in work of any type. Farm labour is tough. 6 to 8 hours in hot sun is extremely difficult and if you can get free money from the govt. what more does any of these labourers want. And ofcourse there is corruption. EVEN IF THE INTERMEDIATERY PAYS 50% IT IS GOOD ENOUGH. SUFFICIENT TO BUY THE DAILY QUOTA OF LIQUOR AND ENJOY LIFE. NO WORK NO AMBITIONS, JUST DRINK AND LIVE LIFE TO THE FULLEST EXTENT.

Farm labour is not available at 180 - 200 per day also. We know it as we live in rural areas, in acity with a popn of 5L and visit the nearby villages regularly.

This scheme is only for making money for the politicians, and best part is it gets them the votes also.
Thanks Damani

Like (2)

shirish patwa

Feb 29, 2012

There is no easy way out.You just cannot erase the curse of unemployment by some charity and subsidies.Unemployment is a economic problem and is to be tackled by economic means only.There are no shortcuts like NREGA.If you are not creating assets worthwhile by funding such schemes,it will go into drain only.Its people's money which is being frittered away.This is being done through deficit financing which is the worst type of taxation as it affects the poor the hardest.The corruption such schemes generates is a parasite,a leech that sucks the blood.

Like (2)

parshuram agarwal

Feb 29, 2012

i agree it is just like any other of their projects, now the govt. has announced free
medicines to all citizens just watch out what will happen.

Like (2)

parshuram agarwal

Feb 29, 2012

i agree it is just like any other of their projects, now the govt. has announced free
medicines to all citizens just watch out what will happen.

Like (2)
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