How Feasible is a Rural Employment Guarantee?
There
is no doubt that employment generation has emerged as not only the most
important socio-economic issue in the country today, but also the most
pressing political concern. The mandate of the recent elections is clear
on this: the people of the country have decisively rejected policies
that have implied reduced employment opportunities and reduced access
to and quality of public goods and services.
Indeed,
one of the main reasons for the defeat of the previous government was
the widespread dissatisfaction with that government's economic policies.
The complete collapse of rural employment generation (which that government
tried to cover up through statistical jugglery and false, even insulting
claims about ''India shining'') was a dominant cause of public dissatisfaction.
Chart 1 shows why this should be so. The latter part of the 1990s witnessed
total rural employment (of all kinds – that is self-employed and wage
labour, principal or subsidiary occupation, full-time or part-time)
growing at the miserable rate of only 0.58 per cent per year, at a time
when the rural population was growing at around 1.7 per cent per year.
Subsequently, matters have hardly improved, although the lack of comparable
data does not allow us to make meaningful calculations of the rate of
change.
This was why almost all the political parties that currently form the
ruling United Progressive Alliance, as well as the Left parties that
have extended outside support, made the issue of employment a major
plank in their electoral campaigns and their manifestos. And the promise
to do something about rural employment generation in particular was
probably one of the most significant promises that actually resonated
with the electorate.
Therefore, it was only to be expected that the promise of generating
rural employment through public works programmes would find major expression
in the declared programme of the new government – avoiding it would
have meant a major retraction from all the promises that have actually
won this new government its current power.
Fortunately, the new government has recognised the importance of this
issue, and the need to do something to regenerate rural economic activity
in particular. One of the first sections of the Common Minimum Programme
of the UPA government makes the following promise: ''The UPA government
will immediately enact a National Employment Guarantee Act. This will
provide a legal guarantee for at least 100 days of employment on asset-creating
public works programmes every year at minimum wage for every rural household.''
This is not a new idea – the United Front government in 1991 had floated
such a scheme, and it has already been sought to be implemented in some
form by state governments such as those of Maharashtra over several
decades. However, such a commitment by the central government is indeed
new, firstly because it promises to make this a legal right of all citizens,
and secondly because the onus of finding the funds for such a programme
(if not the actual implementation) rests squarely with the central government
rather than with the states.
This is a very important commitment, and one that should be given top
priority, if the new government wants to remain faithful to its mandate.
However, this particular promise is already being excoriated in the
financial press, and by skeptical observers who find any public outlays
that benefit the common people to be ''populist'' and undesirable, even
when they wholeheartedly approve of fiscal measures that end up transferring
huge amounts of public assets and resources to large capital and the
already rich.
The main criticism that is being raised against this programme is that
it would simply be too expensive and therefore impossible for the government
to fulfill this particular promise. All kinds of extravagant claims
are being made about the fiscal outlays that are required, and the numbers
are so inflated as to make the attempt appear to be impossible.
In this context, it is worth investigating the actual costs likely to
be associated with this programme in a more realistic way. The first
point to bear in mind is that, while the employment guarantee is a legal
guarantee provided to every rural household, quite obviously every such
household would not take up the offer. Employment schemes have the great
virtue of being self-selecting by the poor (and therefore not requiring
targeting) since anyone who can get income above the minimum wage through
any other activity would not be interested.
Therefore, it is likely that only a proportion of rural households would
choose to avail of the offer and take up such employment, and even among
such households, not all of them would choose to take up such employment
for the full 100 days that are promised. Given the prevailing estimates
of rural poverty, wage incomes and occupational structure of the rural
population, the chances are that between one-third to around 40 per
cent of all rural households would choose to exercise this right across
the country – which is between 49 to 59 million households.
This does not necessarily mean that only this number of households would
be involved in such a programme; rather, that the total number of employment
days that would require to be generated would be around that number,
with possibly more households than that participating but some households
taking less days of work from such programmes.
Now consider the cost per household. This involves providing 100 days
of work to any member of the household at the minimum wage. The minimum
wage varies across states, but the weighted average can be taken as
Rs. 60 per day. Of course the assumption must be that the wages would
be equal for men and women workers – which is what is legally required
but has not always been followed in employment programmes thus far.
This means that the wage component of the cost per participating household
would be Rs. 6,000 per year.
Assume that wages will account for two-thirds of the total cost, so
that the non-wage component would come to Rs. 3,000 per year, generating
a total cost of Rs. 9,000 per year per household. The non-wage component
is slightly less than it has been in recent years in existing employment
schemes, but it is argued that this is easy to achieve especially with
decentralised panchayat-level control over such resources and the implementation
of this programme.
This means that the total cost of such a programme would probably come
to somewhere between Rs. 44,000 crores and Rs. 53,000 crore per year.
These calculations are presented in Table 1.
Table
1 : Estimated cost of employment guarantee (Figures in rupees per year) |
||
Wage
cost per household |
Non-wage
cost per household |
Total
cost per household |
6000 |
3000 |
9000 |
(Figures
in millions) |
||
Total
households |
40
per cent of households |
33
per cent of households |
148 |
59.2 |
49.3 |
(Figures
in crores per year) |
||
Total
cost with 40 per cent of households |
Total
cost with 33 per cent of households |
|
53100 |
44100 |
|
At
first glance this may seem like a large amount for an annual outlay.
However, a number of points have to be borne in mind in this connection.
First, even if such employment generation yielded no other positive
result, the fact is that increased wage incomes in rural areas would
generate more demand for rural goods and services, and thus generate
positive multiplier effects. In a condition of major economic slack,
such as operates in the rural economy of India today, this would have
large beneficial implications for material conditions, and even contribute
to increased tax revenues because of higher levels of economic activity.
Second, it must be remembered that such a programme does not involve
an expenditure of resources for the sole purpose of creating employment.
Rather, the idea is to use the workers productively in activities which
will build or maintain assets in the countryside, or provide important
social or economic services. So such expenditure will yield dividends
not only in terms of higher levels of economic activity in the present
but also through improving the conditions of production in rural areas.
There are many such potential activities which can have important effects
on supply conditions, productivity and sustainability of rural economic
activities, in both agriculture and non-agriculture.
For example, constructing and maintaining roads and other connectivity
(which has thus far been the most popular form of activity in such schemes)
has direct and indirect effects in agricultural marketing and a whole
range of other economic activities, besides generally improving the
conditions of rural residents. But other activities, which are often
far less captial-intensive, such as building and maintaining bundhs,
minor irrigation works, clearing out and desilting ponds and rivers,
also have very positive short run and long run effects on production
conditions and can also improve the sustainability of cultivation patterns
generally, implying important social gains.
But even these do not cover the full range of possibilities in terms
of productive and useful activities that can be undetaken under such
an employment programme. There is a huge range of social services that
must be performed, which are now systematically underprovided across
rural India. These include activities such as those performed by workers
in educational and health institutions who provide maintenance and support,
the provision of mid-day meals in schools, sanitation services, and
the like. There is no question that greater provision of such necessary
public services would greatly improve the quality of life of rural residents,
and also contribute directly and indirectly to economic growth.
So this amount is really not very much when seen as part of a broader
public investment and development programme that is particularly focussed
on rural regeneration, which is unquestionably the most urgent policy
focus today. In any case, some Rs. 6100 crores was already committed
to rural employment schemes in the interim budget, so this involves
an additional outlay of around Rs. 40,000 crores.
Third, consider how this amount compares with other expenditures made
by the central government. Chart 2 provides the interim budget 2004-05
estimates of outlays on defence, subsidies and rural employment, as
well as the current estimate of additional resource requirement for
employment guarantee. It is evident that the proposed new outlay is
well below the anticipated defence expenditure, and even below the projected
expenditure on subsidies.
In
any case, this projected amount likely to be spent on employment guarantee
is a trifling percentage of projected GDP – amounting to only 1.55 per
cent of projected GDP at the coverage of one-third of rural households
and still only 1.86 per cent of GDP at 40 per cent coverage. This is
well below the proposed increased expenditure of this government on
education, and indeed well below a large range of other less productive
expenditures of the government.
More to the point, it is substantially below the fiscal effect of the
large tax give-aways of the central government, which over the period
since 1980-81, have caused the central tax-GDP ratio to fall from more
than 13 per cent to less than 10 per cent. It is interesting that the
same economists who have supported such huge transfers to the rich through
lower tax collections, have been the most bitterly opposed to employment
schemes which would not only provide relief to the poor of the country
but also create valuable assets and provide important social and economic
services.
In sum, the employment guarantee scheme has much to recommend for itself.
It costs about as much or far less than many other lower priority activities,
which have in some cases have been rightly emphasised by this and previous
governments. It can be dealt with in a manner which simultaneously ensures
the realisation of the pressing need to increase capital formation in
rural India. If properly planned and implemented it can help deliver
much need quality public services in rural India. By providing incomes
to those it need it most it can help redress an unacceptable feature
of the Indian economy – the persistence of large scale poverty.
Finally, while achieving all this it would result in increases in output
and tax revenues, which helps finance a part of the expenditure on the
scheme. There can be no better example of a winning initiative. Therefore,
there is no real need to defend it against those who perversely welcome
''dream budgets'' with tax concessions as progressive and market friendly,
while illegitimately dismissing an employment guarantee scheme that
is targeted at increasing capital formation and productivity in rural
India.