Friday, May 05, 2006

The Employment Guarantee Act: Can India Have Economic Growth Led by the Poor?

The Employment Guarantee Act: can India have economic growth led by the poor?

Sukumar Muralidharan
August 25, 2005

By the philosophical standards established over a decade-and-a-half of economic reforms, it was thought to be a leap into the unknown. But few of the economic pundits who chose to voice their scepticism over the National Rural Employment Guarantee Act – adopted by Parliament in the last week of its monsoon session – had similar reservations about the various leaps into the dark that the process of “economic reforms”, as they have been called, has involved. There was then the comfortable calculation that tax rate cuts would not diminish revenue, since economic growth and better compliance would in fact, ensure its buoyant growth. That calculation has been devastated by the actual record of revenue collection since the reforms began in 1991.
There have been few voices though, that have been raised against the direction of tax reform, which severely limits the government’s ability to tackle essential social commitments. The employment guarantee act (EGA) though, has brought forth a torrent of dire forecasts. When not predicting an impending fiscal meltdown, or inflation galloping beyond manageable numbers, the doomsayers glumly prophesy corruption outstripping even the massive scales it currently is at.

At first glance, there was much that seemed to be running in favour of these arguments. Here was a government binding itself and all succeeding governments, to providing a guaranteed minimum of employment to the rural poor. This was an obligation that would last into the foreseeable future and beyond, since the only escape route from the EGA would lie in the intended beneficiaries themselves deciding that the protections it affords are superfluous.
The plain fact then, is that no rigorous costing exercise has been done on the EGA commitments. This has allowed critics to float the figure of Rs 40,000 crore as the annual financial commitment involved in the limited employment guarantee. A calculation by economists sympathetic to the cause has arrived at a roughly similar figure: around Rs 25,000 crore. The rough correspondence in orders of magnitude indicates that both critics and champions are on the same track

The difference between the two, is that the critics want no additional tax effort from the government, while the sympathisers of the EGA believe that one would be necessary at some stage. There would even in the absence of a fresh tax effort, be no immediate threat of a fiscal train-wreck, since the economy -- in the estimation of the economists who have championed the EGA -- has sufficient spare capacity to absorb the rapid increase in purchasing power that it would entail.

The rural poor who find themselves suddenly enjoying the luxury of guaranteed employment, are first likely to devote their earnings to the purchase of essential food items. And the food stocks currently available with the government, running at embarrassingly bloated levels, could meet this extra demand, neutralising any possible risk that the the injection of fresh purchasing power into the economy would fuel an inflationary spiral.

The EGA offers a hundred days of assured employment to every household in 150 of the poorest districts of India. The target group will soon be raised to 200 districts. More energetic advocates of the law had argued for universal coverage. Alternatively, they were willing to settle for a compromise that would make the law applicable all across the country within a defined time horizon. The government has given neither commitment. It obviously intends to see how the law shapes up in the first few years of its implementation and assess its diverse consequences – including the budgetary cost, the impact on rural wage rates, food production, and overall inflation – before undertaking any further commitments.

Addressing the Rajya Sabha just hours before it was scheduled to vote on the bill, Prime Minister Manmohan Singh essentially put on record the long-term strategic plan. He lauded the proposed law as “pathbreaking” and the “most important piece of legislation in independent India”. He also chose to sound a note of warning, and to gently chide the left parties that had been the most insistent in pressing the case for the EGA.

Manmohan Singh referred to the preoccupation of the left-wing chief minister of West Bengal, Buddhadeb Bhattacharya, recently expressed in an investor’s meeting in Singapore, for enhancing the flow of foreign capital into his state. Bhattacharya had also committed himself to the range of investor-friendly reforms that his party comrades in the CPI(M) have consistently opposed at the centre. His irony did not escape the left-wing members of the Rajya Sabha, who appeared at a loss for an adequate riposte. But the sub-text of the Prime Minister’s remarks seemed to suggest that his commitment to the EGA was conditional.

Those in the business of governance, Manmohan Singh, urged, should ensure that the target of 7 to 8 percent economic growth was achieved every year. They also needed to shed dogma and look anew at the subsidies that had been built into the fiscal system through years of cultivating various political constituencies. The message was clear: without growth on the expected scale and a rationalisation of other expenditure commitments, the outlays needed to guarantee rural employment, may simply not be forthcoming.

After all the words of commendation he had for the EGA, this was a chastening wake-up call. The Prime Minister’s intent was clear. He expected the left parties, whose parliamentary sustenance is vital for the survival of his government, to cease being a roadblock to his ambitions as far as economic liberalisation is concerned. The EGA was a reluctant price he paid to win the longer term acquiescence of the left in his plans to privatise state enterprises and open up more sectors of the economy to foreign capital investment.

The paralysis of left opposition perhaps is not surprising. What is so, is Manmohan Singh’s belief, nurtured despite all the adversities reality has visited on him, that growth in the aggregate is an adequate medicine for the blight of poverty. What the experience of the last decade-and-a-half in fact proves, is that an economy can have buoyant growth without even scratching the surface of poverty. Growth in the era of globalisation does not diminish poverty. It creates an illusion of wealth within certain strata that in its turn, provokes a consumption surge. And this in turn could trickle down the scale of wealth, temporarily pushing up incomes in proximate classes. The illusion of wealth at the top of the income scale, in other words, creates an illusion of poverty being reduced at the bottom.

Most of the world has awoken to the fallacies – and the outright data fabrications – that underlie this story. The growing realisation now is that growth propelled by the consumption of the rich only polarises societies. Even as it generates temporary income effects at the lower end of the scale, it relentlessly increases disparities. And the transient income gains will rapidly be dispelled in situations when financial speculation exceeds prudent limits, as is increasingly the norm now.

The EGA affords the Indian government an opportunity to move out of the discredited paradigm that poverty would diminish as a consequence of growth. The alternative model is to attack poverty directly through income and assets redistribution, and a restoration of rights that have long been denied the poor. The entry of the poor into the economic mainstream would in itself, constitute a powerful motor for economic growth. Despite his ardent words of commitment to the EGA, Manmohan Singh’s recent locutions suggest that he has a long way to travel before he grasps the new economic commonsense.

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