Its core operating principle that employment should respond to need has been replaced by predetermined shares based on the devolution criteria of the 16th Finance Commission. A flexible rural safety net has been recast as a conventional centrally sponsored scheme with fixed state-wise entitlements, cost-sharing ratios, and hard ceilings.
Mgnrega was designed as an inherently counter-cyclical intervention. Spending automatically rose during periods of rural distress — droughts, crop failures, migration surges or economy-wide shocks. It functioned as one of India’s most effective automatic fiscal stabilisers. During the Covid-19 crisis, expenditure surged from the normal range of ₹60,000-73,000 crore to over ₹1.11 trillion in 2020-21, providing immediate income support to rural households when urban and formal sectors collapsed.
Under the new normative allocation model, this counter-cyclical responsiveness has been curtailed. Central funds are now determined by a static formula that creates predetermined state-wise caps. During a future drought, pandemic or agricultural shock, states cannot automatically access higher central resources beyond their normative share. This weakens the scheme’s ability to act as a macroeconomic buffer and risks amplifying the depth and duration of rural downturns.
By capping central liability and requiring states to fully fund any expenditure beyond their allocation, the new design risks compressing total programme spending during distress periods. If states are unwilling or unable to top up their allocations, aggregate rural expenditure will fall below previous levels. This could dampen rural consumption, weaken demand for local agricultural and non-farm goods, and exert downward pressure on rural wages.
A less responsive rural employment guarantee also weakens the safety net. Fewer guaranteed workdays during distress could accelerate migration to urban areas, increasing pressure on city infrastructure and informal labour markets. Over time, reduced programme elasticity may contribute to greater labour market dualism, with a larger pool of underemployed rural workers and heightened vulnerability to seasonal or shock-induced unemployment. The scheme’s traditional role in building rural assets and human capital is also likely to weaken if overall spending becomes less responsive to need.
At first glance, the formula appears progressive. The 42.5 per cent weighting on income distance is intended to direct more resources towards poorer states. Combined with population and area weightings, it channels funds towards regions with greater structural need. However, a closer look reveals a clear bias towards size.
The 17.5 per cent population weighting inherently advantages the largest states. When combined with the income distance criterion, it privileges states that are both big and poor. The new 10 per cent weighting on contribution to gross domestic product further tilts the balance towards states with larger economic footprints. The consequences are visible in the dramatic reordering of inter-state shares.
Uttar Pradesh will nearly double its share, while Madhya Pradesh will record a sharp increase. Bihar will also gain. At the other end, Tamil Nadu will see its share almost halved. Andhra Pradesh and Kerala will also suffer significant relative declines.
States with strong implementation records and responsive local governance under the old system will now be penalised by a formula that places little value on past performance. The result is not a clean redistribution from rich to poor, but a shift from smaller and mid-sized states — some facing intense localised distress — to the largest demographic blocs.
A small, poor district in Odisha or Jharkhand with acute seasonal unemployment may not receive resources proportional to its need if the state does not rank high enough on macro indicators. Conversely, a large state with pockets of relative prosperity can still secure a substantially higher share because of its overall size. The formula thus rewards bigness as much as backwardness. With the biggest gainers also being states with substantial parliamentary representation, the reallocation amplifies the voice of demographically dominant states rather than necessarily reaching the most vulnerable populations.
The deeper concern lies in the subversion of cooperative federalism. Under Mgnrega, states assessed local needs through labour budgets and Gram Sabhas, while the Centre acted as the fiscal backstop during crises. This created a genuine partnership, with states enjoying autonomy in planning and implementation.
The new normative model replaces this with a top-down formula. States no longer drive allocation through demonstrated demand; they receive predetermined shares based on static criteria decided in Delhi. This weakens responsiveness to local needs. High-demand states may hit their normative cap and then face the choice of rationing work or bearing 100 per cent of additional costs under the new 60:40 sharing arrangement.
The combination of normative caps and a higher state contribution alters fiscal federalism dynamics. States losing share under the formula face a double whammy; lower central transfers and higher mandatory contribution. This may push some states to cut other developmental spending or increase borrowing, raising state-level fiscal stress. It also reduces the incentive for states to accurately project genuine demand, since exceeding the cap carries full financial responsibility.
The Centre now sets the rules, defines the formula, imposes performance conditions and retains overriding power over allocations for Union Territories (UTs). It positions itself less as a responsive partner and more as the primary provider dispensing resources according to its own criteria.
This centralising tendency is particularly stark for the Union Territories, especially those with legislatures, like Jammu & Kashmir. Their share will be determined by the Centre on performance criteria and other parameters it deems appropriate, giving the Union government significant discretion and reducing predictability.
The adverse character of the new arrangement will become most visible during periods of stress. Once a normative allocation is exhausted, additional work must be funded entirely by the state or UT. The Centre’s liability is capped while the risk of under-provision is transferred downward. What was once a shared responsibility for guaranteeing rural employment has become a centrally rationed transfer with states and UTs bearing the residual burden.
The writer is an economist and former finance minister of J&K
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