Managing Informality: Why Employment Guarantees Matter?

“Weakening the institutions that govern informality does not solve the problem; rather, it makes it more invisible, uneven, and expensive in the long term.”

Exploring the significance of employment guarantees: Beyond merely renaming MGNREGA to VB-G RAM G, it is crucial to address its critical role in managing informality and ensuring job security.

The rural job guarantee in India hasn't been completely abolished. Rather, it is changing in ways that make it less effective at protecting state finances, stabilising informal labour markets, and serving as a countercyclical tool. This change has far-reaching effects that go beyond rural employment; they directly affect India's federal system's informal economy, fiscal capability, and rising debt levels

MGNREGA as an Informality Buffer

The majority of jobs in India are informal. In such an economy, employment guarantees play a role that standard welfare programmes do not. When informal employment collapses, particularly during droughts, agricultural distress, or shocks to the economy as a whole, MGNREGA has served as a backup plan. This fallback option was important for more than just financial support. MGNREGA improved workers' bargaining powers in unofficial labour markets by establishing a reserve wage and providing stable state employment. It decreased the acceptance of low wages and unstable working circumstances that were driven by hardship. In effect, it partially formalised labour relations without requiring formal contracts. This position relied on credibility. Employees insisted on employment due to the legally binding assurance. States responded well due to the predominantly federal and unrestricted funding. As credibility diminishes, the programme's impact on the job market diminishes correspondingly. From Demand-Driven to Discretionary The new amendment modifies this state of affairs. Central allocations are progressively limited and discretionary, whereas states are constitutionally bound to provide employment or unemployment benefits. The transition seems administrative; nonetheless, it significantly alters incentives. MGNREGA was established as a demand-driven initiative. Employment increased as distress grew. With constrained finance, demand ceases to dictate supply. When resources become scarce, employment goes down regardless of the requirement. The programme loses its counter-cyclical nature exactly when it is most needed. This modification converts a job guarantee into a regulated programme. The assurance exists legally but not practically. Informality and Fiscal Capacity: A Distorted Matchup The consequences become especially severe in states with high levels of informality. These states encounter increasing demand for public employment while possessing less fiscal capacity. Limited tax bases, declining revenue generation, and reliance on transfers hinder their capacity to manage fiscal risk.

Under the new system, the responsibility for addressing job demand is transferred to governments with the least financial capacity. The outcome is quite predictable. States could be forced to react by restricting job creation, postponing approvals, or underreporting demand. What seems to be inadequate execution is, in reality, a logical reaction to unbalanced incentives. The outcome is thus a distorted alignment: the states that require MGNREGA the most are structurally discouraged from utilising it to its full extent. Debt Stress and the Loss of Counter-Cyclicality

Previously, MGNREGA facilitated counter-cyclical expenditure predominantly at the national level, protecting states from incurring debt during economic downturns. This is significant because Indian states function under stringent borrowing limitations and fiscal regulations that restrict deficit growth. With little central support, governments must choose between reducing employment or self-financing it. Many states will be forced to choose compression. Others resort to arrears, deferred wage disbursements, or elevated borrowing, aggravating state-level financial strain. Labour-market disruptions therefore result in budgetary hardship, which subsequently limits future governmental expenditure. The stabilising function of the job guarantee is thereby weakened.

A Self-Reinforcing Trap

These changes create a feedback loop. Inadequate job assurances compel people to revert to low-productivity informal employment. The increase in informality diminishes the revenue base and undermines budgetary capability. Reduced fiscal capacity exacerbates debt pressure and constrains state action. Diminished intervention further undermines work security. The result is not a temporary interruption but a structural predicament, one that solidifies labour-market duality and regional inequality.

Why This Matters?

Employment guarantees are effective when demand, finance, and legal obligations are in harmony. Disrupting this alignment transforms a rights-based institution into a discretionary entity. The repercussions are disproportionately borne by informal workers and financially challenged governments. In addition, given the absence of robust rural demand, conventional stimulus tools, such as GST rationalisation and accommodative monetary policy, will have constrained effectiveness. Strengthening MGNREGA during downturns can provide the income security necessary to anchor rural consumption, thereby improving the transmission of both fiscal and monetary easing. The discourse on MGNREGA should thus transcend yearly budgetary allocations or administrative efficacy. The issue at hand is whether India maintains an institutional framework adept at controlling informality and stabilising state finances, or if it permits these risks to be subtly transferred downstream, where they become more challenging to mitigate.

(Opinions are personal) Acknowledgement :Thanks to Alan Seemon for his review and valuable comments.