As Budget Day draws near, economic policy makers in the country are likely to shift their attention to the allocation of funds to various programmes planned for the upcoming year. Nrega is one such programme. The Mahatma Gandhi National Rural Employment Guarantee Act aims to provide at least 100 days employment to the rural unemployed and underemployed by engaging them in rural infrastructure building.While well-intentioned, our research based on careful study of employment and operating data from factories show that Nrega has led to some interesting consequences: factory jobs have declined by more than 10% and mechanisation has increased by 22.3% as a result of implementing Nrega.It may have led to the migration of workers from higher value productive factory work to digging pits and filling them, with factories choosing to mechanise faster instead of replacing these workers. Nrega beneficiaries are required to exert some effort in order to earn a minimum wage. The purpose of such a requirement is to prevent those who are otherwise gainfully employed from crowding out these jobs and to ensure that only the truly unskilled and unemployed take up these jobs. Our research reveals that what transpired in practice was very different.We looked into how implementing Nrega in a region adversely impacts the availability of labour for nearby factories, using factory-level data from the Annual Survey of Industries across the period 2002-10. Since our data includes time periods before and after Nrega was introduced, we are able to perform a pre-post analysis. Our results show that nearly 10% of the permanent factory workers jettison their factory jobs to join the Nrega bandwagon.Why would a factory worker prefer 100 days a year of minimum wage Nrega work building rural infrastructure over an entire year's work at wages higher than minimum in a factory? We show that Nrega work is unlikely to involve a lot of effort. More importantly , workers may prefer the 100 days of guaranteed and effortless work near home to a high-effort high-risk factory job far from home. Having a job close to home also means less out-of-pocket expenses on travel, clothing and other requirements of factory work.It is quite possible that such workers either work as contract workers in factories or do odd jobs in their villages during non-Nrega days. There was no decline in contract workers so it is plausible that the outflow of contract workers to Nrega was offset by erstwhile permanent workers turning into contract workers.How did factories respond? Consider a factory whose cost of production is Rs 100 per unit if it employs workers and Rs 110 per unit if it employs machines to do a job. Naturally , the factory is likely to employ workers. Now if because of the availability of the Nrega option, workers demand Rs 120 per unit, the factory is likely to find using machines cheaper and let the workers go. This is indeed what we found.Note that if the increase in wages is a result of increased productivity, per unit cost remains unchanged and hence factories are likely to continue employing workers as before.Why is this migration of factory workers to Nrega undesirable? First, it defeats the very purpose of workfare, which is to prevent the already employed from cornering workfare jobs at the expense of truly unemployed. Second, this phenomenon negatively impacts both the Make in India and Skill Development programmes launched by the Centre. Factories that do not have access to ample financing to mechanise and cope with the labour shock engineered by Nrega may be forced out of business.Third and most importantly , Nrega may be turning skilled factory workers into unskilled pit fillers (since Nrega discourages the use of machines of any form) while the really unskilled continue to be unemployed. Impact on skill development is severe and may have deeper consequences for human capital development in India as a country .Our findings show that it is important to not just focus on allocation but also on programme design. From a societal point of view, there is a need to redesign Nrega to encourage skill development and discourage entry of gainfully employed productive workers. Imposing quantity and quality based output targets for the programme could be a first step in this direction.(Sumit Agarwal is professor of finance at Georgetown University, Shashwat Alok is assistant professor of finance at ISB, Yakshup Chopra and Prasanna L Tantri are research associate and senior associate director respectively at ISB)