In a significant policy shift, the central government has, for the first time, imposed a cap on spending under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), limiting expenditure to 60 per cent of its annual allocation during the first half of the 2025–26 financial year.

The move marks a departure from the scheme’s demand-driven model, under which spending was based on actual work demanded by rural households without a fixed ceiling.

The Indian Express has reported, citing sources that the Ministry of Finance has brought MGNREGS under the Monthly/Quarterly Expenditure Plan (MEP/QEP) — a cash management framework introduced in 2017 to streamline government spending and reduce excessive borrowing.

Until now, MGNREGS had been exempt from this mechanism, with the Ministry of Rural Development (MoRD) consistently arguing that the nature of the scheme made rigid expenditure limits unfeasible.

However, in a directive issued at the beginning of the 2025–26 fiscal year, the Finance Ministry asked MoRD to align MGNREGS spending with the MEP/QEP framework. Following this, the Rural Development Ministry submitted its proposed plan to the Budget Division, requesting a higher spending allowance for the initial two quarters.

The Finance Ministry, however, rejected the proposal and, in a communication dated May 29, permitted the ministry to spend up to 60 per cent of the total annual allocation of Rs 86,000 crore — amounting to Rs 51,600 crore — by the end of September.

While this cap appears to be in line with historical spending trends in the first half of the fiscal year — which have typically ranged between 50 and 60 per cent — officials say the new restriction could severely affect employment generation this year. The concern stems from a large backlog of unpaid dues carried over from the previous year.

Government officials confirmed the newspaper that approximately Rs 21,000 crore in liabilities remain unsettled from the last fortnight of the 2024–25 financial year, which ended on March 31. A substantial portion of this year’s allocation will therefore be used to clear those arrears, rather than generate new work.

The financial constraints come at a time when the MoRD has set an ambitious labour budget of 198.86 crore persondays for 2025–26, of which 67.11 per cent — or 133.45 crore persondays — are expected to be created in the first six months. As of June 8, the Centre has released Rs 24,485 crore, which constitutes 28.47 per cent of the total MGNREGS outlay for the year.

Officials in the Finance Ministry have also raised questions over the scale of the pending liabilities, citing provisions of the MGNREGA Act, 2005, which mandate that wages be paid within 15 days of work completion. They have sought explanations for how such a large amount remained unpaid despite the statutory requirement.

Launched in 200 of India’s most underdeveloped rural districts in 2006–07, MGNREGS was gradually scaled up to cover the entire country by 2008–09. The scheme became a crucial lifeline during the Covid-19 lockdown in 2020–21, when a record 7.55 crore rural households availed work.

However, participation has declined steadily since then, with 7.25 crore households employed in 2021–22, 6.18 crore in 2022–23, 5.99 crore in 2023–24, and 5.79 crore in 2024–25. These figures exclude West Bengal, where the scheme has remained suspended since March 2022 due to alleged irregularities.

The imposition of expenditure limits on what has historically been one of the government’s most flexible and responsive welfare schemes signals a more controlled fiscal approach but may also limit its effectiveness as a rural safety net at a time of economic uncertainty.