In Stimulus, The Helping Hand

FM’s policy of guaranteed loans to urban poor is superior to other welfare schemes

- Krishnamurthy Subramanian

Among proposals announced by FM Sitharaman on Monday, an important element is the credit guarantee scheme to incentivize microfinance institutions (MFIs) to lend to the urban poor.

Undoubtedly, the urban poor has experienced stress due to the pandemic and consequent economic restrictions. Several commentators have suggested a job-guarantee scheme for urban areas to alleviate their distress.

This suggestion is based on the rural job guarantee scheme MGNREGA. While MGNREGA has been useful in alleviating rural distress during the unprecedented pandemic, we must not forget the large inefficiencies that stem in normal times from the permanent entitlement it creates.

Extensive research on MGNREGA provides evidence of such inefficiencies. In a democratic polity, permanent entitlements created by schemes such as MGNREGA, the National Food Security Act, etc are hard to unwind. An urban job guarantee scheme would suffer the same fate.

Second, replicating the rural MGNREGA to urban areas poses several challenges because of key differences between rural and urban employment. Unlike rural employment, urban employment is not seasonal. Moreover, as skill levels vary significantly in urban employment, having one wage for all will not work as with rural MGNREGA.

Third, an unintended effect of an urban job-guarantee program would be to increase migration into urban areas. Given the differences in the cost of living, the wage under an urban job-guarantee programme has to be higher than the rural one. This difference would increase urban migration.