MacroScan (Printable Version) - How to pay for the Employment Guarantee

Increasingly it looks as if the UPA government will try to introduce an Employment Guarantee Act in the near future. It is obviously equally incumbent upon it to substantially increase the resources that are to be made available for employment schemes, especially in the rural areas. Both of these were positive promises of the CMP, and it is necessary to hold the government to these promises.

However, thus far the bureaucratic moves in this direction have been characterised by remarkable lack of ambition. At the moment, the declared plan to begin to implement the employment guarantee in 150 backward districts is being thought of in government circles in a very limited way. The proposal apparently is to combine some existing schemes, shift money from some other schemes to this one, and generally try to implement the scheme in these districts with only a modest additional outlay of resources. The argument being made is that this is necessitated by the lack of increased budgetary allocation under this head and the need to accommodate other demands which also reflect promises made in the CMP, such as increased public expenditure on health and education.

In fact, in the mainstream media the bogeys are already being raised that all this is going to cost far too much and is therefore not feasible; that the costs of a universal employment guarantee scheme alone would be so great that it would turn out to be simply impossible to sustain; and that this may imply greater tax burden on the middle classes who are already suffering higher rates of consumer price inflation.

While these are predictable responses, they reflect a deeper urge among the elite and those among the middle class who have benefited from the previous decade of inequalising policies, to avoid a change in economic policy direction. In fact, each of these arguments can be effectively countered. In particular, it can be shown that the employment guarantee scheme is neither likely to be as expensive over time as many of the projections suggest, nor as difficult for the public exchequer to finance.

Consider first of all the estimated cost of the employment guarantee. Suppose that it is first of all only for rural areas, and confined only to 100 days per person (although this is clearly not ideal). On the basis of the available data on rural labour force, per capita consumption and the like, it may be estimated that some 35 to 40 per cent of the rural labour force would be the maximal number of those seeking such employment. Many of them in turn would not necessarily require such work for the full 100 days. Therefore let us assume that a maximum of 100 million people would require such work through the public employment programme.

If only one adult per household (rather than any adult who wants it) is provided with such work at the minimum wage, then the number of people eligible for such work would be even less, at between 35 and 40 million. This is in fact what the CMP has promised, but it is certainly less than desirable, and in fact the preferable option should be to try to provide such wage employment to any adult, male or female, who wishes to avail of the opportunity.

At the minimum wage (which can be taken at a national average of around Rs. 60 per day) and with 2:1 ratio of wages to material costs, the cost per worker comes to Rs. 9,000 per year. This generates total costs of between Rs. 31,000 crores and Rs. 36,000 crores per annum. Remember that this is likely to be a maximal estimate, since actual demand may be much less and may actually decline over time (for reasons that are explained below).

This may be why one estimate currently circulating in official circles pegs the estimated cost at Rs. 25,000 crores. If half of the wage component is provided in foodgrain, the financial cost comes down even further, and there are some implicit public savings since this would reduce the food stock carrying costs of the Food Corporation of India.

But how is even this amount of resources to be mobilised? This is the question that is most frequently asked by critics of the programme. Recently, the Minister for Rural Development, Shri Raghuvansh Prasad Singh, suggested that there could be another cess on taxes (similar to the education cess of 2 per cent imposed in the last Budget) to raise some of the money. This was immediately seized upon by the media to warn of the pressure that was going to put upon ''ordinary citizens'' by such taxation measures.

It is true that a cess on taxes is less than ideal as a method of resource mobilisation, since it is essentially regressive in nature and affects the prices of commodities purchased by the poor. But in fact there are numerous other ways of raising tax revenues which can be considered quite easily. The turnover tax on stock market transactions, which caused share brokers to make a very vocal protest, was one such measure. Such a tax has a lot of potential, but unfortunately the Finance Minister caved in to brokers’ pressure and reduced the spread and rate of taxation, so that much less revenue will be earned from it.

At the same time, the capital gains tax was removed and has not been re-imposed despite the dilution of the turnover tax. There is no reason not to impose a capital gains tax, which simply takes a small share of the proceeds of essentially unproductive activities. There is a lot of scope for broadening the scope and coverage of taxes on services as well. India currently has one of the lowest tax to GDP ratios in the world, which is hardly justified even at this relatively low level of per capita income.

But even raising more tax revenues - necessary as it is in the medium term - is not an essential prerequisite for providing more public resources to critical areas such as the employment guarantee programme. One of the simplest ways of generating financial resources - simply printing more money - appears to have been forgotten in the general debate about finding the money for government spending at the present time.

The traditional argument against printing money to cover public deficits - of deficit financing - was that it would cause inflation. That was based on a simplistic notion of what constitutes money supply, which even monetarist economists would blush to admit to nowadays. However, the basic idea - that any deficit that causes expenditure to increase beyond output would be inflationary - is also only valid in a world where supply bottlenecks prevent output from rising as demand rises.

In an economy that is in India’s current macroeconomic situation, with foodgrain surpluses, large foreign exchange reserves and excess capacity in industry, there is no reason to expect that increased public spending would be inflationary; rather, it would generate more economic growth. The basic point is that such deficit-financed government spending will lead to a rise in output which will generate the very savings necessary to back it up. This makes arguments of ''crowding out'' both irrelevant and inapplicable.

More importantly, if the spending is directed towards rural works programmes or rural public services, for example, it would generate the most desirable kind of growth, which would have large multiplier effects, increase rural economic activity and therefore create more rural jobs indirectly. This in turn means that the initial spending on rural employment programmes, if it is done properly, will have multiplier effects that increase the availability of other, non-public, income generating activities.

Over time, that would mean the employment generation in the rural economy would improve, and also create more employment diversification in the countryside. Therefore, spending on employment programmes would have positive effects upon total employment that are far greater than the direct effect in terms of jobs paid for by the public exchequer. In the most ideal scenario, an effective employment guarantee would create conditions making itself superfluous over time, in that it would indirectly generate many more job opportunities in the rural economy.

Of course this is the best possible scenario, but it should be apparent that even when there are large leakages from the system (whether through corruption or inefficiency) money that is spent in the rural areas is not entirely wasted because of the positive multiplier effects that it generates.

Of course it is important to improve delivery systems and devise methods of making such expenditure more effective, as well as making the managing institutions more accountable and responsive to local people. But the huge advantage generated simply by the fact of higher spending in the rural economy, should not be lost sight of.

This also means that money spent on rural employment schemes will eventually pay for itself, and only the more short-sighted of macroeconomists, with a very short time horizon, would fail to realise this. So the very positing of the question: ''where is the money?'' is misleading especially in this case.



Themes > Current Issues	15.10.2004


How to pay for the Employment Guarantee

Jayati Ghosh

Increasingly it looks as if the UPA government will try to introduce an Employment Guarantee Act in the near future. It is obviously equally incumbent upon it to substantially increase the resources that are to be made available for employment schemes, especially in the rural areas. Both of these were positive promises of the CMP, and it is necessary to hold the government to these promises. However, thus far the bureaucratic moves in this direction have been characterised by remarkable lack of ambition. At the moment, the declared plan to begin to implement the employment guarantee in 150 backward districts is being thought of in government circles in a very limited way. The proposal apparently is to combine some existing schemes, shift money from some other schemes to this one, and generally try to implement the scheme in these districts with only a modest additional outlay of resources. The argument being made is that this is necessitated by the lack of increased budgetary allocation under this head and the need to accommodate other demands which also reflect promises made in the CMP, such as increased public expenditure on health and education. In fact, in the mainstream media the bogeys are already being raised that all this is going to cost far too much and is therefore not feasible; that the costs of a universal employment guarantee scheme alone would be so great that it would turn out to be simply impossible to sustain; and that this may imply greater tax burden on the middle classes who are already suffering higher rates of consumer price inflation. While these are predictable responses, they reflect a deeper urge among the elite and those among the middle class who have benefited from the previous decade of inequalising policies, to avoid a change in economic policy direction. In fact, each of these arguments can be effectively countered. In particular, it can be shown that the employment guarantee scheme is neither likely to be as expensive over time as many of the projections suggest, nor as difficult for the public exchequer to finance. Consider first of all the estimated cost of the employment guarantee. Suppose that it is first of all only for rural areas, and confined only to 100 days per person (although this is clearly not ideal). On the basis of the available data on rural labour force, per capita consumption and the like, it may be estimated that some 35 to 40 per cent of the rural labour force would be the maximal number of those seeking such employment. Many of them in turn would not necessarily require such work for the full 100 days. Therefore let us assume that a maximum of 100 million people would require such work through the public employment programme. If only one adult per household (rather than any adult who wants it) is provided with such work at the minimum wage, then the number of people eligible for such work would be even less, at between 35 and 40 million. This is in fact what the CMP has promised, but it is certainly less than desirable, and in fact the preferable option should be to try to provide such wage employment to any adult, male or female, who wishes to avail of the opportunity. At the minimum wage (which can be taken at a national average of around Rs. 60 per day) and with 2:1 ratio of wages to material costs, the cost per worker comes to Rs. 9,000 per year. This generates total costs of between Rs. 31,000 crores and Rs. 36,000 crores per annum. Remember that this is likely to be a maximal estimate, since actual demand may be much less and may actually decline over time (for reasons that are explained below). This may be why one estimate currently circulating in official circles pegs the estimated cost at Rs. 25,000 crores. If half of the wage component is provided in foodgrain, the financial cost comes down even further, and there are some implicit public savings since this would reduce the food stock carrying costs of the Food Corporation of India. But how is even this amount of resources to be mobilised? This is the question that is most frequently asked by critics of the programme. Recently, the Minister for Rural Development, Shri Raghuvansh Prasad Singh, suggested that there could be another cess on taxes (similar to the education cess of 2 per cent imposed in the last Budget) to raise some of the money. This was immediately seized upon by the media to warn of the pressure that was going to put upon ''ordinary citizens'' by such taxation measures. It is true that a cess on taxes is less than ideal as a method of resource mobilisation, since it is essentially regressive in nature and affects the prices of commodities purchased by the poor. But in fact there are numerous other ways of raising tax revenues which can be considered quite easily. The turnover tax on stock market transactions, which caused share brokers to make a very vocal protest, was one such measure. Such a tax has a lot of potential, but unfortunately the Finance Minister caved in to brokers’ pressure and reduced the spread and rate of taxation, so that much less revenue will be earned from it. At the same time, the capital gains tax was removed and has not been re-imposed despite the dilution of the turnover tax. There is no reason not to impose a capital gains tax, which simply takes a small share of the proceeds of essentially unproductive activities. There is a lot of scope for broadening the scope and coverage of taxes on services as well. India currently has one of the lowest tax to GDP ratios in the world, which is hardly justified even at this relatively low level of per capita income. But even raising more tax revenues - necessary as it is in the medium term - is not an essential prerequisite for providing more public resources to critical areas such as the employment guarantee programme. One of the simplest ways of generating financial resources - simply printing more money - appears to have been forgotten in the general debate about finding the money for government spending at the present time. The traditional argument against printing money to cover public deficits - of deficit financing - was that it would cause inflation. That was based on a simplistic notion of what constitutes money supply, which even monetarist economists would blush to admit to nowadays. However, the basic idea - that any deficit that causes expenditure to increase beyond output would be inflationary - is also only valid in a world where supply bottlenecks prevent output from rising as demand rises. In an economy that is in India’s current macroeconomic situation, with foodgrain surpluses, large foreign exchange reserves and excess capacity in industry, there is no reason to expect that increased public spending would be inflationary; rather, it would generate more economic growth. The basic point is that such deficit-financed government spending will lead to a rise in output which will generate the very savings necessary to back it up. This makes arguments of ''crowding out'' both irrelevant and inapplicable. More importantly, if the spending is directed towards rural works programmes or rural public services, for example, it would generate the most desirable kind of growth, which would have large multiplier effects, increase rural economic activity and therefore create more rural jobs indirectly. This in turn means that the initial spending on rural employment programmes, if it is done properly, will have multiplier effects that increase the availability of other, non-public, income generating activities. Over time, that would mean the employment generation in the rural economy would improve, and also create more employment diversification in the countryside. Therefore, spending on employment programmes would have positive effects upon total employment that are far greater than the direct effect in terms of jobs paid for by the public exchequer. In the most ideal scenario, an effective employment guarantee would create conditions making itself superfluous over time, in that it would indirectly generate many more job opportunities in the rural economy. Of course this is the best possible scenario, but it should be apparent that even when there are large leakages from the system (whether through corruption or inefficiency) money that is spent in the rural areas is not entirely wasted because of the positive multiplier effects that it generates. Of course it is important to improve delivery systems and devise methods of making such expenditure more effective, as well as making the managing institutions more accountable and responsive to local people. But the huge advantage generated simply by the fact of higher spending in the rural economy, should not be lost sight of. This also means that money spent on rural employment schemes will eventually pay for itself, and only the more short-sighted of macroeconomists, with a very short time horizon, would fail to realise this. So the very positing of the question: ''where is the money?'' is misleading especially in this case.



© MACROSCAN 2004