MacroScan (Printable Version) - The Economic Case for Employment Guarantee

The UPA government has committed to legislating an employment guarantee for both rural and urban areas, which would ensure at least 100 days of public employment for a member of poor and lower middle class households. A start is to be made with a Rural Employment Guarantee Act, to be implemented first in 150 districts and then extended to the entire country within five years.

These commitments of the government are absolutely essential, both politically and economically. The collapse in employment growth over the past decade was a major contributor to the popular dissatisfaction with the previous government, and all the political parties involved in the new government had promised a redirection of economic policy to increase employment and revive agriculture.

However, even before the proposed legislation can be tabled in Parliament, there is already strong opposition to it both within and outside government. The criticisms that are being levelled are broadly on three grounds. First, that the public resources required for implementing the EGA are so large that the entire scheme is simply unsustainable, and in any case the government at present can simply not afford it. Second, that in any case such public money is better spent directly on large infrastructural investments which would directly assist economic growth. Third, that this is just throwing money away because of the large leakages in the delivery system, which ensure that the intended beneficiaries will receive only a small proportion of the money that is spent.

None of these criticisms is valid, despite some superficial plausibility. Consider the first argument, that such a programme of guaranteeing employment would cost too much for the government to bear. Obviously, it is difficult in advance to predict exactly how many people would avail themselves of the opportunity to work at some pre-established wage. There are various estimates of the total cost, ranging from Rs. 25,000 crore to Rs. 45,000 crore per year to cover all of rural India. This is only between 0.7 and 1.5 per cent of the GDP, a trifling proportion. Such an amount can be raised quite easily if there is sufficient political will.

India's central tax-GDP ratio (at less than 10 per cent) is currently among the lowest in the developing world. Furthermore, it has been declining for two decades, especially after neo-liberal economic reforms were introduced in 1991. If the tax-GDP ratio of the central government were simply brought back to the level of 1991, that would release another 2.5 per cent of GDP, which is more than enough to cover the entire amount estimated for the proposed EGA, and still leave enough to pay for the school meals programme across India.

Suppose the government is even more ambitious, and tries to raise the tax-GDP ratio to that prevailing in Sub-Saharan Africa. That would release more than 7 per cent of GDP, that is around Rs. 210,000 crore, which is more than enough to finance all the developmental goals of the government.

So the perceived shortage of resources only reflects political unwillingness to increase tax collection. Similarly, choosing to spend in areas other than public employment generation also reflects a certain political choice. For example, the government has already made it clear that it will continue with the programme of nuclear weaponisation, which is potentially very dangerous and also incredibly expensive, yet there are no murmurs about the cost to the country involved in such expenditure.

In any case, there is no reason to fear increased public spending on employment generation in the current context. There is substantial macroeconomic slack in the form of excess capacity and large-scale unemployment and underemployment, excess foreign exchange reserves and more than comfortable food grain stocks. This means that more public spending is not likely to be inflationary. Instead, it will generate much more economic activity (and therefore also tax revenues) over time.

Therefore there is a strong case for substantial allocation of resources for an employment programme. If resources cannot immediately be raised through taxation, the programme can be financed through government borrowing from the Reserve Bank of India (that is, deficit financing) instead of from commercial banks, since that involves a much lower rate of interest and in any case will not be any more inflationary.

This gives rise to the second argument – that even if the government can afford to spend more now, such spending is best directed towards large-scale capital-intensive infrastructure projects that the private sector cannot or will not take up. It is argued that these will generate more growth in the long run by easing supply bottlenecks.

This argument involves the fallacy of treating different types of expenditure as necessarily substitutes rather than complementary. It also ignores the crucial point that the Indian economy at this point must move towards employment-led growth, since the past pattern of jobless growth is neither economically desirable nor politically acceptable.

Most significantly, the point is that employment generation schemes, if imaginatively conceived and properly implemented, can have very substantial effects in terms of creating conditions for much higher levels of economic activity and therefore growth, especially in the rural areas. To begin with, there are the obvious multiplier effects of such spending. Wage employment puts money in the hands of rural workers who are therefore able to spend on basic consumer items, which will play an important role in reviving local markets and rural industries. Since the entire rural economy is in severe depression, such a positive effect is very important, since it will create conditions for the further expansion of private economic activity in rural India.

In addition, since the EGA will ensure public employment of a certain level for a continuous period, it will allow local authorities to plan to and put such labour to the best possible use. These uses can include creating durable rural assets, water management and watershed development, activities designed to increase land productivity and create more sustainable agriculture with less chemical use, providing essential public services such as sanitation and mobilisation for health purposes, providing mid-day meals in school, and the like. All these not only ensure a better quality of life for rural residents, they also have critical effects in enabling future economic growth on a sustainable basis.

The third criticism is probably the strongest, since it is found even among those who otherwise welcome an employment guarantee for the poor. This is the argument that corruption and weak delivery systems will ensure that the target population will get very little of the benefits, and that the money will be badly used or effectively wasted. Obviously, there are serious grounds for concern on this score, since even the bravest supporter of governments at state and central level would not argue that there are no leakages in government expenditure.

But there are two reasons why this should not deter an Employment Guarantee Act. The first is that, while obviously corruption and wastage cannot be condoned and must be minimised, the legal commitment to spend in rural areas would rectify some of the large increase in urban-rural disparity that occurred in the past decade. Even if there are leakages, money spent inside the rural economy will play a positive role because of its multiplier effects. The second reason is even more important. It is now quite well known that the only real check on leakage and corruption is community participation, empowerment and control. But this is precisely what the Act proposes, using panchayati raj institutions. It is interesting that those who oppose this Act are also generally opposed to the Right to Information Act. They would accept higher spending if politically necessary, but oppose enactment of fiscal commitment or political empowerment. More than anything else, it is this attitude to public spending and to economic rights that encourages the corruption and leakages which they then piously decry.

So it is clear that the prevailing criticisms of the EGA do not hold water and that the benefits of such legislation and such expenditure would greatly outweigh the potential difficulties. This being said, there are still problems with the legislation as it is currently being conceived. One problem is with the definition of household. Women's groups such as AIDWA have pointed out that the current provision restricting the scheme to one member per household is problematic not only because of its gender implications, but because the poor often are forced into large households by the cost of living. It is much better to provide an open scheme whereby any rural adult, male or female, is eligible for such a guarantee.

The second problem is the restriction of the guarantee to 100 days. This, and the earlier provision, reflect the fear that otherwise the requirement of employment would become too large of the government to handle. But the Maharashtra EGS experience shows that this need not be the case. In any case, the administrative costs of working out 100 days per households may turn out to be quite large, and could be done away with in a more open-ended scheme. This would of course have a beneficial upward effect on rural wages in general, which may be why some sections oppose it so strenuously.

Ultimately, the EGA is a major move in the right direction. It can provide much-needed employment for the rural poor and can become the basis for the necessary regeneration of the rural economy, without which sustainable aggregate growth is not possible.



Themes > Current Issues	27.10.2004


The Economic Case for Employment Guarantee

Jayati Ghosh

The UPA government has committed to legislating an employment guarantee for both rural and urban areas, which would ensure at least 100 days of public employment for a member of poor and lower middle class households. A start is to be made with a Rural Employment Guarantee Act, to be implemented first in 150 districts and then extended to the entire country within five years. These commitments of the government are absolutely essential, both politically and economically. The collapse in employment growth over the past decade was a major contributor to the popular dissatisfaction with the previous government, and all the political parties involved in the new government had promised a redirection of economic policy to increase employment and revive agriculture. However, even before the proposed legislation can be tabled in Parliament, there is already strong opposition to it both within and outside government. The criticisms that are being levelled are broadly on three grounds. First, that the public resources required for implementing the EGA are so large that the entire scheme is simply unsustainable, and in any case the government at present can simply not afford it. Second, that in any case such public money is better spent directly on large infrastructural investments which would directly assist economic growth. Third, that this is just throwing money away because of the large leakages in the delivery system, which ensure that the intended beneficiaries will receive only a small proportion of the money that is spent. None of these criticisms is valid, despite some superficial plausibility. Consider the first argument, that such a programme of guaranteeing employment would cost too much for the government to bear. Obviously, it is difficult in advance to predict exactly how many people would avail themselves of the opportunity to work at some pre-established wage. There are various estimates of the total cost, ranging from Rs. 25,000 crore to Rs. 45,000 crore per year to cover all of rural India. This is only between 0.7 and 1.5 per cent of the GDP, a trifling proportion. Such an amount can be raised quite easily if there is sufficient political will. India's central tax-GDP ratio (at less than 10 per cent) is currently among the lowest in the developing world. Furthermore, it has been declining for two decades, especially after neo-liberal economic reforms were introduced in 1991. If the tax-GDP ratio of the central government were simply brought back to the level of 1991, that would release another 2.5 per cent of GDP, which is more than enough to cover the entire amount estimated for the proposed EGA, and still leave enough to pay for the school meals programme across India. Suppose the government is even more ambitious, and tries to raise the tax-GDP ratio to that prevailing in Sub-Saharan Africa. That would release more than 7 per cent of GDP, that is around Rs. 210,000 crore, which is more than enough to finance all the developmental goals of the government. So the perceived shortage of resources only reflects political unwillingness to increase tax collection. Similarly, choosing to spend in areas other than public employment generation also reflects a certain political choice. For example, the government has already made it clear that it will continue with the programme of nuclear weaponisation, which is potentially very dangerous and also incredibly expensive, yet there are no murmurs about the cost to the country involved in such expenditure. In any case, there is no reason to fear increased public spending on employment generation in the current context. There is substantial macroeconomic slack in the form of excess capacity and large-scale unemployment and underemployment, excess foreign exchange reserves and more than comfortable food grain stocks. This means that more public spending is not likely to be inflationary. Instead, it will generate much more economic activity (and therefore also tax revenues) over time. Therefore there is a strong case for substantial allocation of resources for an employment programme. If resources cannot immediately be raised through taxation, the programme can be financed through government borrowing from the Reserve Bank of India (that is, deficit financing) instead of from commercial banks, since that involves a much lower rate of interest and in any case will not be any more inflationary. This gives rise to the second argument – that even if the government can afford to spend more now, such spending is best directed towards large-scale capital-intensive infrastructure projects that the private sector cannot or will not take up. It is argued that these will generate more growth in the long run by easing supply bottlenecks. This argument involves the fallacy of treating different types of expenditure as necessarily substitutes rather than complementary. It also ignores the crucial point that the Indian economy at this point must move towards employment-led growth, since the past pattern of jobless growth is neither economically desirable nor politically acceptable. Most significantly, the point is that employment generation schemes, if imaginatively conceived and properly implemented, can have very substantial effects in terms of creating conditions for much higher levels of economic activity and therefore growth, especially in the rural areas. To begin with, there are the obvious multiplier effects of such spending. Wage employment puts money in the hands of rural workers who are therefore able to spend on basic consumer items, which will play an important role in reviving local markets and rural industries. Since the entire rural economy is in severe depression, such a positive effect is very important, since it will create conditions for the further expansion of private economic activity in rural India. In addition, since the EGA will ensure public employment of a certain level for a continuous period, it will allow local authorities to plan to and put such labour to the best possible use. These uses can include creating durable rural assets, water management and watershed development, activities designed to increase land productivity and create more sustainable agriculture with less chemical use, providing essential public services such as sanitation and mobilisation for health purposes, providing mid-day meals in school, and the like. All these not only ensure a better quality of life for rural residents, they also have critical effects in enabling future economic growth on a sustainable basis. The third criticism is probably the strongest, since it is found even among those who otherwise welcome an employment guarantee for the poor. This is the argument that corruption and weak delivery systems will ensure that the target population will get very little of the benefits, and that the money will be badly used or effectively wasted. Obviously, there are serious grounds for concern on this score, since even the bravest supporter of governments at state and central level would not argue that there are no leakages in government expenditure. But there are two reasons why this should not deter an Employment Guarantee Act. The first is that, while obviously corruption and wastage cannot be condoned and must be minimised, the legal commitment to spend in rural areas would rectify some of the large increase in urban-rural disparity that occurred in the past decade. Even if there are leakages, money spent inside the rural economy will play a positive role because of its multiplier effects. The second reason is even more important. It is now quite well known that the only real check on leakage and corruption is community participation, empowerment and control. But this is precisely what the Act proposes, using panchayati raj institutions. It is interesting that those who oppose this Act are also generally opposed to the Right to Information Act. They would accept higher spending if politically necessary, but oppose enactment of fiscal commitment or political empowerment. More than anything else, it is this attitude to public spending and to economic rights that encourages the corruption and leakages which they then piously decry. So it is clear that the prevailing criticisms of the EGA do not hold water and that the benefits of such legislation and such expenditure would greatly outweigh the potential difficulties. This being said, there are still problems with the legislation as it is currently being conceived. One problem is with the definition of household. Women's groups such as AIDWA have pointed out that the current provision restricting the scheme to one member per household is problematic not only because of its gender implications, but because the poor often are forced into large households by the cost of living. It is much better to provide an open scheme whereby any rural adult, male or female, is eligible for such a guarantee. The second problem is the restriction of the guarantee to 100 days. This, and the earlier provision, reflect the fear that otherwise the requirement of employment would become too large of the government to handle. But the Maharashtra EGS experience shows that this need not be the case. In any case, the administrative costs of working out 100 days per households may turn out to be quite large, and could be done away with in a more open-ended scheme. This would of course have a beneficial upward effect on rural wages in general, which may be why some sections oppose it so strenuously. Ultimately, the EGA is a major move in the right direction. It can provide much-needed employment for the rural poor and can become the basis for the necessary regeneration of the rural economy, without which sustainable aggregate growth is not possible.



© MACROSCAN 2004