One of the most important policy initiatives in recent years is the national rural employment guarantee bill. The bill has again become the subject of heated debate since the eagerly awaited report and recommendations of the standing committee of the ministry of rural development have just been tabled in parliament. Opinions about the likely effects of the bill have been sharply divided along predictable lines. The left has been demanding vociferously that the scope of the draft bill needs to be widened considerably in order to make a dent on poverty and unemployment. On the other hand, the right proclaims equally stridently that the bill will be an unmitigated disaster and drive the government into bankruptcy. With both sides taking rather extreme positions vociferously, voices in the 'middle' have tended to be drowned out.
The draft bill promised to provide 100 days of employment to one person from each family below the poverty line in rural India. The government view has been that universal unemployment insurance or a guarantee of 'jobs for all' is a highly desirable target, but one that can only be reached in the long run in view of the sums of money involved. This selective approach has been criticized by the standing committee which has instead recommended a drastic increase in coverage by suggesting that anyone who is willing to perform manual work at the prescribed wages must be provided employment. At the other end of the spectrum, the right has come up with all kinds of figures, which claim to demonstrate that even the sum of Rs 38,000 crore ' the sum set aside by the government for the NREG scheme ' will drive the government into bankruptcy.
I will return to the important issue of the 'optimum' size of the scheme later on. It is arguably more important to convince oneself about the desirability of such a scheme. In other words, why is it important to provide at least some of the rural poor with a legal guarantee of partial employment' Why are rural development schemes like the many we have had before not adequate substitutes'
The answer is, of course, very simple. The bill, once passed by parliament, will make it mandatory on the part of the government to provide employment to job-seekers according to the terms of the bill. It will tie down the hands of the government completely. It cannot advance any reason at all to escape from this legal responsibility. In economics jargon, the government will be 'pre-committed' to providing some kind of unemployment insurance. It is not out of place here to mention that the 2004 Nobel Prize in Economics was given to E. Prescott and F. Kydland primarily for their work on the importance of institutional devices which force the government to pre-commit to certain policies. Shorn of jargon, the bill provides the rural poor with a cast-iron guarantee of at least a limited degree of unemployment insurance. This is particularly important in view of the proclivity of governments of all hues to break promises when large sums of money are involved.
Only a small minority of people will argue against the need for welfare schemes or safety nets such as the employment guarantee scheme. They point out rather naively that rural unemployment in Maharashtra has been amongst the highest in India, although Maharashtra has installed an employment guarantee scheme for a long time. This argument is na've because rural poverty in Maharashtra may well have been substantially higher in the absence of the EGS.
But, the typical argument against the NREG bill is that while it is desirable conceptually, it is not implementable. In particular, this school asserts that all such schemes are characterized by huge leakages ' only a minuscule amount of the total outlay will actually reach the intended beneficiaries. Unfortunately, this is not a wild allegation. Even Jean Dreze, one of the principal supporters of the employment guarantee bill, has written about the absence of muster-rolls in food-for-work programmes in several states. Of course, the absence of such rolls means that middlemen can seize most of the grants.
Another contentious issue is the level of wages to be offered to the beneficiaries. The standing committee has recommended that the wage in any state be fixed at either the minimum wage specified by the state government or 75 per cent of the national minimum wage, whichever is higher.
Unfortunately, market wages are lower than the prescribed minimum wages in several states. The leftist retort would probably be, 'Who cares about markets anyway' But this is an extremely myopic view. If market wages are below the wages offered under the EGS, then the EGS will be flooded with huge hordes of people wanting to work at the higher wages. Obviously, an immediate effect will be that the programme will become unsustainable ' the government will simply not have the requisite funds. It will, of course, also raise market wages. But this may well be at the cost of a reduction in the size of the rural labour force employed outside the EGS. This would surely not be a happy outcome.
The size of the EGS is also an important policy issue. Should the government be selective and adopt the provision in the draft bill supporting just one member from each poor family' Or should it be more inclusive and include everyone who wants to work under the programme' The latter has the advantage that there will not be any bureaucratic problems of verifying whether an intended beneficiary is actually from a BPL family. The larger the size of the EGS, the greater is the financial burden on the government. However, a large EGS raises other important issues.
What are the projects that will be built with this labour force' Since the main purpose of such schemes is to provide additional employment, the projects that can be carried out must be highly labour-intensive. Indeed, the draft bill places an upper bound on the non-wage component of expenditure. This places a constraint on the kind of infrastructure or assets which can be created. A 'small' labour force can be utilized productively in repairing roads and other existing infrastructure.
A larger labour force can only be utilized if new assets are built. But, given the restriction on the composition of expenditure, typically these will be assets which are not particularly durable. I remember fellow economist, Kaushik Basu, writing about 'Roads that get washed away' ' a pointed reference to rural works programmes of dubious quality. This obviously implies a waste of the non-labour inputs used up in the programmes. One might as well ask labourers to dig up holes and then fill them up.
There are many other practical and procedural problems involved with the adoption of an employment guarantee scheme. In particular, what will be the role of the state governments which have already pleaded their inability to bear any financial burden' Why will they have any incentive to plug leakages since they do not bear any costs' Unfortunately, there has been very little positive discussion of these issues because the chief participants in the debate on the NREG bill have been busy either in shooting it down or in making extravagant claims about its benefits. It is time now to accept the fact that a national EGS will be adopted, and think of ways of making it better.