The employment guarantee scheme in India | by Kaustav Banerjee

by Oct 17, 2011All Articles

Mass joblessness is an everywhere phenomenon in the developing world. The existence of an ever-growing reserve army of labour manages to keep working wages below a living minimum. Hence, the majority of the working class in any third world economy can get nicely tied up in circles on the one hand trying to fight for higher wages and dignity while on the other trying to remain employed. Just around the corner lurks a similar worker whose desperation might be just enough to take your job for less pay. That’s a win-win situation for capital – it is cost efficient and is an effective deterrent to any collective working-class struggle.
This happy condition for capital can get interrupted when states intervene in the market, especially if these states practise some form of electoral democracy. Unfortunately, the vast majority of the working people are also voters! So the party wanting power has to, from time to time, address some needs of the voters. Often, populist promises before the elections have to be enacted – say, for example, the Employment Guarantee Act in India, the NREGA.

To neoliberals, higher social sector spending goes against the principles of ‘sound finance’. If the government spends more in creating employment for the poor, in providing infrastructure, basic facilities, providing better health facilities, drinking water, mid-day meals etc., it essentially falls short of earning revenue, they say. To cover that deficit, the government might take to printing money which will lead to inflation.

The mainstream media of course parrots these arguments when discussing any unemployment reducing measure − or any programme for mitigation of hunger − and the common citizen accepts this as the truth.

Half truths and lies can be far more dangerous in creating consent, because of our collective lack of understanding on this crucial issue. Hence, what is of concern to us is the truth. Should the government spend money in the social sector, try to reduce unemployment and provide basic facilities, or should the state stay out of the market? These were the questions that faced the people’s movements in India

Employment as a right
The National Rural Employment Guarantee Act (NREGA) is an example of a rights-based approach where work is provided on demand. It relies on the principle of self-selection. People who want to do hard manual labour at minimum wages will demand and be given work by the state.

Firstly, the NREGA is designed for the creation of productive assets. Secondly, the process is not a top-down mechanism but relies on the principle of decentralisation. Hence, the local population have a say in what kind of public asset is required for their specific context.

The right to work conceived in this way can become a tool in the hands of the workers in increasing their wages, creating productive assets for their local situation and most importantly decentralisation of decision making. All of this contributes to increasing the bargaining strength of the poorest and most vulnerable workers vis-à-vis the employers. Some of these benefits are starting to materialise in the Indian context.

For the most oppressed

NREGA has generated employment for almost 194 million rural households, or almost 9 billion person-days of employment at an expenditure of $24 billion (R176 billion). Between 50 and55% of the participating households are from the socially marginalised communities of Dalits and Adivasis. Nearly half the workers on NREGA worksites are women.

While the government can claim this to be a proof of inclusiveness, these trends are also a stark pointer to the rural distress in India. The fact that more of these depressed classes are now working in a public programme cannot be claimed as a yardstick of success. Nevertheless, historically marginalised communities and especially women were before generally denied work in public works programmes, but they can now demand and receive employment.

The wages received on NREGA worksites are also higher than the local rates available to the most marginalised workers. Higher wages create an incentive for more labour force participation in public works, but the demand for such hard manual labour should be a pointer to the distressing conditions prevailing in rural India. And even with higher wages there still exists discrimination between wages for women and men.

Wage increase in rural areas
With NREGA, wages have seen a significant upward trend, probably for the first time since India became independent. When the NREGA started, the daily minimum wage rate for a sizeable number of Indian states was lower than or around $1.4 (R10.30) – currently it is nearly $2.15 (R15.80). In fact, some states now have effectively raised their daily wage rates substantially. The reason, however, is not just the result of collective bargaining in some pockets across the country. The economic mechanism is such that the national government pays the wage bill and hence the provincial state governments have an incentive to revise minimum wages. Wage rates have been enhanced by 17-30% by linking it to the inflation index for rural areas.

Agricultural wages have been lower than minimum wages and NREGA has managed to change this situation by providing labour a basis to ask for higher wages. But, the wage increase over five years is still less than a dollar!

Saving water
Water conservation, irrigation and land development account for almost three-fourths of the assets created by NREGA jobs − especially on lands owned by small peasants. Almost 68% of India’s farmlands are under rain-fed conditions. Anything that increases water efficiency or land productivity will ultimately help agriculture. Over the last few years, agricultural growth rates in the traditional rain-fed states of India have been higher than in the green revolution states. The complementary role being played by NREGA for raising agricultural productivity over time is hard to deny. This is the main reason why the design of NREGA is being further improved to increase productivity in rain-fed areas in India under the Twelfth Plan period (2012–17).

These kinds of dynamics imply that public investment to reduce unemployment has the potential to positively affect growth. But the neoliberals would want us to believe that higher social sector spending implies an adverse effect on growth in a predominantly agrarian economy.

Tax the rich, or run a deficit
Broadly, there are two ways to finance an increase in government spending: tax the rich or borrow either from the central bank (deficit financing) or from the market. Given the number of millionaires inside the Indian parliament, any increase in the tax rates of the richer sections is of course a non-starter. Some media reports claim there are around 300 millionaires in the parliament! Hence deficit financing or market borrowings will have to be the route. 

The suggestion of deficit financing of NREGA was given to the government in 2006. There was also a design to pay part of the wages through food and part through cash. This however was not accepted, but would probably have been more effective than just a cash wage programme. In 2009, the Food Corporation of India’s (FCI) warehouses were over stocked with grains and ran monumental losses. If the government borrowed from the central bank and re-routed the money through the FCI by paying part of the wages with the grains held in reserve, then the losses of the FCI would have come down and workers would have received higher incomes. The majority of the workforce (almost 77%) in the unorganised sector lives at below subsistence levels. Thus any increase in wage incomes of the poorest would mean that it would be consumed.

Unemployment means no freedom

Deficit financing is deceptively simple. The government injects money in programmes like NREGA. This leads to an increase in incomes and then to an output bigger than the injection. This is the ‘multiplier’ mechanism. Effectively, higher income means higher spending and hence more income – which means that there would be an increase in the government’s tax revenue collection, even with unchanged tax rates. Higher governmental spending does not necessarily mean higher deficits. 

The neoliberal bogey of ‘sound finance’ is showing disastrous results for the poor across the globe. The Indian government has in fact adopted a Fiscal Responsibility and Budgetary Management Act to tie in the hands of the state, if it tried to increase spending to alleviate unemployment and poverty. The global recession and the bailout packages have rendered the Act irrelevant at present. Not only India, but most advanced capitalist countries are shunning neoclassical orthodoxy to bail themselves out of the crisis. The ongoing crisis in countries across the world should teach us not to take neoclassical economists too seriously. Even they can’t practise what they preach.

The problem of mass unemployment can be addressed by any state only if it respects its own freedom to decide its future. And a nation with a mass of unemployed people cannot be free.

Dr Kaustav Banerjee is stationed in New Delhi, at the Centre for Studies in Science Policy – Economic Research Unit, JNU. He can be reached at .

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