Kaushik Basu: Reservations on the EGA

A food-for-work programme without a legal guarantee is a good idea

The purpose of this essay is to argue that the national rural employment guarantee act (EGA), as it is currently tabled in Parliament, is not a good idea.

The original idea behind this policy came from economists whose judgment and integrity I value greatly. But the mangled version that has reached Parliament is best shelved.

The reasons for my misgivings are different from the ones that have appeared in the popular media.

The fiscal burden of such a project, whether it be Rs 40,000 crore, as some of its proponents suggest, or more, is not the reason why one should jettison the idea, as some demurrers of the EGA have argued.

Just think of the invisible subsidies that are given to the wealthy""the superior civic amenities such as roads and water supply in areas where the rich live, the near-free university education, which goes mainly to the better-off, and the information and enabling facility that allow them to buy up land in areas where future development is expected and so the price of property is expected to rise, are just some examples of unfair benefits to the rich.

If we added up the value of these, it would cross the budget of the employment act many times over.

If we can spend so much on the rich, we can certainly spend that much on the poor and the disadvantaged. I find myself at one with the spirit of this legislation, which is to provide basic economic security for the poor and the vulnerable, and I oppose it because I do not think that it will serve that spirit.

One feature of this programme that has been advertised as its strength is its alleged "self-selectivity". Let me explain. Many anti-poverty programmes have gone bankrupt because it is difficult to tell who is truly poor.

When money is doled out, it is in everybody's interest to line up and collect the manna. To prevent this one needs to do background checks and keep lists of who is poor and who not (and in rural areas this will keep changing from season to season).

This, in turn, can give rise to a burgeoning bureaucracy and corruption. One programme that showed some natural immunity against this is what was started in Maharashtra in 1973 and all over India in 1977.

This is the so-called Food for Work Programme (FFW)""also known by other names like Jawahar Rozgar Yojana or Employment Guarantee Scheme""whereby rural works projects are started in villages and a low wage is set, and anybody who seeks employment on the project is given work.

Since one has to actually work to get the benefit of an FFW, it is natural to expect that only the very poor will seek work. Hence, in the parlance of economists, the poor "self-select" themselves for this project.

There is no need to do background checks.

The version of the EGA that is being debated in Parliament does not have the property of self-selection. In the present version one person in each household has the right to work for 100 days each year.

As soon as this kind of a condition is added on, the need for information rears its head. When a person offers himself for work at a rural works programme under the EGA, we will need to know if others in this person's household have work/worked under this scheme.

And, this in turn will mean that we will need to know who belongs to which household. Since a "household" is generally defined as a group of persons sharing a common kitchen, this is bound to give rise to disputes hard to resolve.

Moreover, we will need to know whether this person has not already worked for 100 days. There are programmes where we are forced to deal with this selection problem.

The reason why this is particularly important in this case is that the bill requires (until a new national wage standard is adopted) each project under the EGA to pay the legal minimum wage for agricultural workers, as fixed by the relevant state government under the Minimum Wages Act, 1948.

It is known that in many areas of India the legal minimum wage happens to be above the market wage that prevails. This will mean that in such regions, there will be a tendency for the rural works programmes to be swamped by potential workers.

This is not to deny that some of this would be mitigated by the market wage itself rising in response to the EGA. But, nevertheless, to have the wage fixed to the legal minimum wage by fiat is a bad idea.

Further, there is a big difference between having rural works programmes, as India did under the Famine Code in colonial times and on a more permanent basis from 1977, and giving people a legal guarantee of employment as under the proposed EGA.

This could lead to the courts being deluged by cases against the state by persons who fail to find employment. One way to prevent this is to make the transactions costs of going to the court so high, because of lawyer fees and a labyrinthine legal bureaucracy that no poor person will want to avail the law.

In that case this will become one more piece of legislation that will join the pantheon of laws that clutter our courts but do not serve the purpose they were meant to serve.

Neither scenario is heartening. What further complicates the matter is that this will be a central legislation with the legal responsibility for running it lying with the state governments.

And finally, it seems very unlikely that these rural works programmes will produce assets, or goods and services of value commensurate with the costs of producing them.

There will be a risk of the rural works programmes becoming the largest public sector enterprise that India has. What then should we do? I believe, if we go along with the spirit of the legislation, instead of its fine print, there are two policy fronts on which the government should move.

First, we should continue to run a nationwide FFW programme but not enshrine it in a law that gives everybody a formal legal guarantee of a job. A 100 per cent full-employment policy has not worked in any country, and there is reason to be sceptical of India being a pioneer.

Second, India should start a social security programme that will provide minimal financial support to the disabled and the unemployed.

This will not be easy and will involve collecting information (so it will not have the advantage of self-selection) but many countries have experience with running social security programmes.

Of course, we will not be able to run it at the level of Sweden or Norway, but a minimal programme is entirely possible. In the current proposal for the EGA, there is a suggestion to set up a Central Employment Guarantee Council to run it.

Borrowing this idea, we should set up a Central Social Security Council and put in charge of this some honourable individuals who have shown commitment to the cause of the poor and know economics.

We could go even further and introduce a new bill that specifies a minimum budget for running such a social security programme. Once such policies are put in place, it will have the additional advantage of allowing us to have more flexible labour laws.

This in turn will create greater demand for labour in the country. And though everybody will not have a guaranteed job, there will be more work and workers will be better off.

(The author is Professor of Economics and Director of the Program on Comparative Economic Development at Cornell University).