A missed opportunity to guarantee minimum wages

There has been a lively debate in the last few months about the respective merits of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and Viksit Bharat – Guarantee for Rozgar and Ajeevika Mission (Gramin) Act, or VB-G RAM G Act for short. Absent from this debate, however, is a critical issue that haunts both Acts: wage rates.

A key parameter

The wage rate is a critical parameter of employment guarantee. A relatively high wage rate can create a lot of enthusiasm among workers, as it happened in the early days of MGNREGA. And, enthusiasm is important for the success of the programme. Conversely, wage suppression can easily be used to restrain the programme or even phase it out over time. Wage rates, in any case, also have a strong influence on programme costs.

The wage rates of MGNREGA workers are determined under Section 6 of the Act. This section has two parts. The first part, Section 6(1), empowers the central government to notify MGNREGA wage rates. Different rates can be notified for different “areas”, and in practice, this has come to mean different States.

Section 6(2) states that until such time as the central government notifies wage rates under Section 6(1), State-specific minimum wages apply. More precisely, MGNREGA workers are entitled to the minimum wage notified by the State government for agricultural labourers.

MGNREGA came into force on February 2, 2006. Until 2009, the central government abstained from notifying wages under Section 6(1). Therefore, State-specific minimum wages applied. In many States, minimum wages for agricultural labourers were higher than market wages at that time. This is one reason why MGNREGA was so popular in those days.

In some States, there were significant increases in minimum wages between 2006 and 2009. The most notable instance was a sharp increase in the minimum wage in Uttar Pradesh in 2007-8 (when Ms. Mayawati was Chief Minister), from ₹58 to ₹100 per day. Some observers argued that State governments were indulging in unrestrained increases in minimum wages because MGNREGA wages were fully paid by the central government. Others countered that State governments had to pay the same wage on their own public works, and that this would be a restraining factor. They also argued that, except in Uttar Pradesh, there was little evidence of sharp increases in minimum wages.

The jury was still out on this when, in late 2009, the central government pressed the panic button and notified MGNREGA wage rates under Section 6(1). In the short term, this led to a further increase in wages, as the central government notified ₹100 per day in most States, with a top-up in States where the minimum wage was above that norm. This was sold as a pro-worker move, in pursuance of a promise made by the Congress Party in the run-up to the 2009 general election. Over time, however, this move enabled the central government to moderate the growth of MGNREGA wages. In fact, the central government froze MGNREGA wages in real terms from then on. To this day, wages are raised State-wise every year to the extent of price increases (based on the Consumer Price Index for Agricultural Labourers), but not more.

Real-wage freeze consequences

This real-wage freeze rapidly led to two serious issues. First, MGNREGA wages started lagging behind minimum wages in many States, as minimum wages rose in real terms but MGNREGA wages did not. By 2025-26, the MGNREGA wage rate was lower — often much lower — than the minimum wage of agricultural labourers in most States, according to a recent analysis by Laavanya Tamang. This defeats an important purpose of MGNREGA: sustaining minimum wages. It also raises the question whether it is at all legal for the government to pay MGNREGA workers less than the minimum wage (this matter was taken up in the Supreme Court of India but was not clearly settled).

The other issue is that MGNREGA wages also started lagging behind market wages. Between 2009 and 2014, real wages were rising quite rapidly in rural India, partly because MGNREGA was tightening the labour market. By 2014, the ratio of MGNREGA wage rate to agricultural wage was around 60% for men and 75% for women at the all-India level, according to Labour Bureau data. The gap maintained itself from then on, as rural wage rates stagnated in real terms.

The real gap is actually much bigger than it looks. The reason is that market wages are not only higher than MGNREGA wages but also (generally) paid on time – often the same day. MGNREGA wages, by contrast, are often paid after long and uncertain delays. The central government keeps denying this, but the evidence is clear, notably from recent studies by the LibTech group. In fact, not only are there delays, sometimes, MGNREGA wages are not paid at all, for example due to technical failures of the Aadhaar-based Payment System or National Mobile Monitoring System. The result is a tremendous “discouragement effect” — many rural workers have lost interest in MGNREGA.

The absence of any marked decline in MGNREGA employment generation levels may seem to contradict this. A recent analysis of Periodic Labour Force Survey data, however, suggests that MGNREGA employment levels are in fact much lower today than they were in the early years of all-India implementation, contrary to official statistics. The growing gap between official statistics and actual employment seems to reflect a major increase in leakages in the same period.

The discouragement effect and the resurgence of corruption are integrally related. When workers lose interest, there is no vigilance. Worse, workers may be tempted to cooperate with corrupt elements instead of working by the rules.

Continuing policy failure

Unfortunately, the VB-G RAM G Act is all set to perpetuate this crisis. For one thing, it does not contain any new, constructive provisions that might help to ensure the timely payment of wages or to curb corruption. For another, it continues to empower the central government to determine wage rates (under Section 10), even as the rationale for this has vanished.

Remember, the argument for an early switch from Section 6(2) to Section 6(1) under MGNREGA was that, when wages are fully paid by the central government, they should not be determined by the State government. Under the VB-G RAM G Act, however, wage costs are shared 60:40 between Centre and States. There was every reason to drop MGNREGA’s Section 6(1) from the VB-G RAM G Act and revert to the principle of Section 6(2): guaranteed payment of minimum wages. Instead, the central government did the opposite: it dropped Section 6(2) and retained Section 6(1), giving itself perpetual powers to set the wage rates of VB-G RAM G workers.

There is another issue here. Section 6(1) of MGNREGA began with a non-obstante clause (“Notwithstanding anything contained in the Minimum Wages Act, 1948”) that acted as a kind of legal fig leaf for overriding minimum wages. Oddly, there is no equivalent of this clause in the VB-G RAM G Act. But then, how can the central government justify paying anything less than minimum wages?

A way forward would be for the central government to notify wage rates equal to or higher than minimum wages in all States (under MGNREGA or the VB-G RAM G Act, as the case may be). This would feed many birds with one crumb. It would put wage payments on a sound legal footing. It would lead to a much-needed increase in real wages. And, it would also produce a simple rule for updating wage rates over time.

More likely, the central government will prolong the real-wage freeze and use it as a means of ensuring that employment generation under the VB-G RAM G Act declines over time. If so, the wage freeze should be challenged in court. Indeed, with the non-obstante clause removed, the payment of anything less than minimum wages is patently illegal.

Jean Drèze is Visiting Professor at the Department of Economics, Ranchi University, Ranchi, Jharkhand