The forthcoming budget is unlikely to propose a steep hike in allocation of funds for the government's flagship rural welfare scheme despite a sharp increase in the wage rates under it.

The finance ministry is likely to allocate only 42,000-45,000 crore for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), a government official told ET.

The scheme will have an opening balance of about 10,000 crore, the official said. This precludes the need for higher allocation in the next fiscal.

The 2010-11 Budget had provided 40,100 crore for MGNREGA, making it the highest allocation for any single social welfare scheme.

The minimum wages under the MGNREGA have risen between 17% and 30% after they were linked to inflation from January this year.

In the current year itself, the higher wages will require an additional expenditure of 3,500 crore.

But the government is not in a position to raise allocation because of higher demand from other schemes and a possible sharp escalation in subsidies because of a rally in commodity prices.

The Food Security Act will require a much higher food subsidy allocation than the near 55,000 crore budgeted this year.

Besides, despite the increase in wages, MGNREGA finances appear comfortable.

By the end of December, only 20,854 crore had been spent under the scheme. This means it has balance of nearly 17,000 crore for the remaining three months of the fiscal year.

The lower than budgeted spend shows that demand for the scheme is not as high as was expected.

But there is a possibility that the higher wages under the scheme may increase the demand for jobs if the market wage rate for unskilled manual work is lower in the rural areas.

In some of the states, the wages under the scheme will rise to over 170 day after they are indexed to inflation . But since MGNREGA is a demand driven scheme, the government will have to provide more funds if the allocation fails to meet the demand.