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.
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
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
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
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.