Why the helicopter economics of NREGA doesn’t work

helicash Vivek Kaul 

The Down to Earth magazine has done an excellent expose of how village heads in Bihar have been siphoning off money from the various government run social scheme primarily MGNREGA (or Mahatma Gandhi National Rural Employment Guarantee Act). “More than 100 mukhiyas are learned to have become millionaires in the past five years. They have amassed wealth by siphoning off money from development projects related to MGNREGA, solar lights, rural roads, Indira Awas Yojana and the public distribution service (PDS),” the magazine points out.
The magazine gives the example of Sunil Verma, village head of Dakkin panchayat who has assets worth more than Rs 3.75 crore, investments over Rs 35 lakh in insurance policies and nearly 14 bank accounts. Village heads whose earn around Rs 8000 per month are purchasing guns, SUVs and appointing private guards for their security.
There are examples of village heads who were earlier construction labourers now driving around in SUVs. “We have discovered only the tip of the iceberg,” Director General of Police (DGP), Abhyanand, told the magazine. The MGNREGA scam is estimated to be around Rs 6,000 crore.
What is happening in Bihar and other parts of the country(which a simple Google search will reveal) as well is an excellent example of the “cantillon effect”. And to understand what it means we need to go back in history.
During the 16th century, the Spanish discovered gold and silver in huge amounts in the “New World,” the continent now known as South America. With all this silver/gold coming into Spain from the New World there was a sudden increase in money supply and that led to inflation in Spain.
Richard Cantillon, an Irish-French economist, who lived in the late 17th and early 18th century, studied this phenomenon and made some interesting observations.
What he said was that when money supply increased in the form of gold and silver it would first benefit the people associated with the process of money creation, the mining industry in general and the owners of the mines, the adventurers who went looking for gold and silver, the smelters, the refiners and the workers at the gold and silver mines, in particular. As Cantillon wrote “If the increase of actual money comes from mines of gold or silver… the owner of these mines, the adventurers, the smelters, refiners, and all the other workers will increase their expenditures in proportion to their gains.”
These individuals would end up with a greater amount of gold and silver i.e. money, before anyone else. This money they would spent and thus drive up the prices of meat, wine, wool, wheat etc. This new money would be chasing the same amount of goods and thus drive up prices.
This rise in prices would impact people not associated with the mining industry as well, even though there incomes hadn’t risen like the incomes of people associated with the mining industry had.
The situation that Cantillon talks about is very similar to what western central banks around the world have been up to over the past few years. They have been printing money and pumping it into their financial systems in the hope of keeping interest rates low, so as to encourage people to borrow and spend money, and in the process kick-start economic which has come to a standstill.
But this money printing has benefited those who are closest to the money creation. This basically means the financial sector and anyone who has access to cheap credit. Institutional investors have been able to raise money at close to zero percent interest rates and invest them in all kinds of assets all over the world, leading to huge bubbles. In the process, these investors have made a lot of money, while the overall economic growth continues to remain slow.
The modern terminology for this mode of operating is “helicopter money” i.e. the government and the central bank printing money and dropping it from a helicopter. So that people pick up the money that is being dropped, spend it, and thus help to revive economic growth.
But what this theory does not take into account is the fact that everybody can’t possibly be standing under the helicopter. Only a few people can. And those people who are standing under the helicopter are the ones who are likely to pick up the money being dropped and thus benefit from its purchasing power.
MGNREGA is no different from helicopter economics. The government has decided to spend a huge amount of money to guarantee jobs to citizens of this country. But there are very few checks and balances to figure out whether the money is actually being spent for what it is meant for. Turns out it is not and is being siphoned off in various ways.
Sanjay Dixit, a member of the Central Employment Guarantee Council (CEGC),
explained the modus operandi of the scam while claiming a Rs 10,000 crore MGNREGA scam had happened in Uttar Pradesh. As he told India Today This includes payment of wages against fake job card holders and fake construction works; creating fictitious purchase invoices, payment to ghost firms against the procurement of various items including hybrid seeds, calendars and publicity material; purchase of instruments used by labourers for construction works and purchase of photo copy machines and computers.”
The village heads in Bihar would have operated along similar lines. The people MGNREGA is benefiting the most, are the village heads and government officials, who are standing right under the helicopter from which the government is dropping money.

The article originally appeared on www.firstpost.com on September 25, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

2 Responses to Why the helicopter economics of NREGA doesn’t work

  1. Vivek you are champion in defining terms , excellent one…

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