Shyamal Majumdar: The hidden cost of job guarantees

THE HUMAN FACTOR

The Employment Guarantee Act that would legally guarantee every household at least 100 days of employment in public work programmes seems to be suffering from birth pangs.

The National Common Minimum Programme had promised to guarantee employment to "one able-bodied person" in every rural, urban poor and lower middle-class household.

However, the Sonia Gandhi-led National Advisory Council (NAC), which is the CMP-monitoring agency of the government, first suggested that the guarantee be restricted to rural households only, and then extended the coverage to "every rural adult".

The council has not stopped at that. Realising that the urban vote bank would not be too happy with this rural bias, it has also suggested that a separate legislation be prepared to address the "acute problem of urban unemployment".

The NAC's eagerness to expand the ambit of employment guarantee is understandable considering the political overtones. But its cost calculation is seen by experts as too conservative.

Consider this: economists in the NAC have proposed that starting with the 150 poorest districts, the programme could be gradually extended to the whole of India within four years. From as little as 0.5 per cent of GDP in the initial year, the cost will gradually rise to 1 per cent of GDP (Rs 40,000 crore at 2004-05 prices) in the fourth year.

The advisory body has also pointed out that if the programme is implemented effectively, it will provide Rs 6,000 a year to each participating household. This will result in as many as 75 per cent of the rural poor (1999-2000 estimates) rising above the poverty line.

The NAC assumed that each person-day of employment generated costs Rs 100 at 2004-05 prices. This would roughly consist of Rs 60 for wages and Rs 40 for the non-labour component, including administrative costs. The figure of Rs 60 for the wage component is quite close to the population-weighted average of state-specific statutory minimum wages for agricultural labourers in different states.

The assumed ratio of non-labour costs to total cost "" 40 per cent "" is in line with recent norms under other public employment programmes. With lower benchmarks for the non-labour component, the unit costs will be correspondingly lower.

For instance, with a lower ratio of 25 per cent for non-labour costs, the unit costs would come down to Rs 80 a person-day of employment.

Combining the benchmark of "100 days per poor household on average" with the assumed unit cost of Rs 100 a day, the NAC says it is easy to estimate the cost of a full-fledged Employment Guarantee Programme.

This simply involves multiplying the number of households below the poverty line by Rs 10,000. The estimated cost is Rs 40,000 crore per year at 2004-5 prices, or 1.3 per cent of GDP.

Economists Jayati Ghosh and C P Chandrasekhar have estimated that the cost could be even lower as not every rural household would take up the job guarantee offer.

But others are not so convinced. This section feels that the cost of guaranteeing employment will be prohibitive with estimates ranging between Rs 40,000 crore and Rs 50,000 crore per year.

For instance, a study conducted by the Institute of Development Studies showed that the execution of an Employment Guarantee Act in Rajasthan alone will cost over Rs 1,600 crore a year. And the money could be "easily" raised, said the study, by introducing 20 per cent additional surcharge on sales tax, 30 per cent additional tax on liquor, enhanced taxes on motor vehicles, mining and advertisements besides revenue from lotteries.

According to an Asian Development Bank (ADB) report, the cost is nearly double the benefit in such schemes. Approximate estimates on the impact of the employment assurance schemes in three states (West Bengal, Gujarat and Haryana) found the cost per job per day to be Rs 200 to Rs 300, which is well in excess of wage rates as rough estimate of benefit to the poor (assuming a zero opportunity cost of time and no costs for additional effort), which were roughly in the range of Rs 35 to Rs 50.

The idea of employment guarantee itself is not new. The United Front government had floated an employment assurance scheme in 1991, and it has already been sought to be implemented in some form by state governments such as those of Maharashtra over several decades.

The experience has not been encouraging. Many studies have shown that only a fraction of the money reached the needy in such schemes in the past. Half was spent on materials, another tenth on overheads, and half the balance went to the non-poor or ghost workers.

In theory, rural employment schemes were supposed to build durable assets to benefit local communities.

In practice, the assets tended to mud roads that disappeared in the next monsoon.

The promise to make jobs a legal right of all citizens is a good idea on paper. The problem, as the ADB Institute report shows, is that successive governments have seen these schemes as basically unemployment doles, with nobody interested in asset-formation.