Rojgar Guarantee Programme is not sustainable

Dr Bharat Jhunjhunwala

The success of the Congress in the recent elections is attributable in part, at least, to the Rojgar Guarantee Program-NREGA. Poor people have certainly got relief by getting 100 days employment. Migration to the cities has reduced. Farmers in Punjab are finding it difficult to get labour from Bihar because they have some alternative employment available under NREGA near their homes. It is only fair that the Congress has got political advantage of the scheme. The BJP never had any program to reach relief to the poor. Poverty is not a part of the BJP ideology. The Left, despite its tilt towards the poor, messed it up by being aggressive in Nandigram and Singur.

However, there are long term problems with NREGA which the Congress will ignore at its peril. On first sight, NREGA appears to be along Gandhiji's thinking. The Mahatma had said that he would rather give jobs to the naked instead of clothes. People could buy clothes from the income. But 'jobs', for Gandhiji, meant commercial market-driven employment, not doles given out under NREGA. Under commercial employment, the farm hand produces wheat that is sold in the market. Both the worker and the employer are not dependent upon government assistance in undertaking this activity. Such employment empowers the workers. They can stand up and demand their rights from the government because their livelihood is not dependent upon the government. The government gains as well. The industrialist pays taxes on the goods produced. Such employment is a win-win proposition for all concerned. The worker gets income, the employer makes profits and the government collects taxes. Such employment is sustainable.

Employment generated under NREGA stands on altogether different footing. The government first imposes tax on running businesses to collect taxes for making these expenditures. Some businesses fold up due to this high burden of taxes. That leads to increase in the number of unemployed and more demand for relief under NREGA. The government has to impose yet higher taxes on the remaining businesses to collect the revenues necessary to foot the larger bill under NREGA. Additionally, businesses have to face higher wage costs. Workers refuse to migrate to places where they are needed. The government made expenditures for providing employment to workers of Bihar to uplift them. This led them to demand higher wages from farmers of Punjab and has raised their labour costs. Businesses have to face two types of pressure from NREGA-higher taxes and higher wages. In this way a regressive cycle of increasing taxes, increasing wages and reducing commercial employment is established.

Furthermore there is a huge problem of leakages. The relief is reached to the people through government bureaucracy. One Village Pradhan told this writer that officials gave approval only to such schemes for which they could collect commissions on materials. For example, officials would approve the making of a holding wall along a river dam even thought it may be useless, because they can collect commission of the wire net supplied. They will not approve making of trenches for ground water recharge because no material is required to be supplied for this work. The amount remaining after leakages is provided to the unemployed workers under the program. The total cost of employment to the economy is much more than the amount reached to the beneficiaries. NREGA is not sustainable because of the regressive cycle of reduction of commercial employment and leakages inherent in the scheme.

The fate of unemployment compensation programmes in western countries confirms these observations. Nobel Laureate Prof Edmund Phelps says: "Although such programs have been substantial in Europe and the US, the working poor remain as marginalized as ever. Indeed, social spending has worsened the problem, because it reduces work incentives and thus creates a culture of dependency and alienation from the commercial economy, undermining labor force participation, employability, and employee loyalty." The alternative according to Prof Phelps is like this: "The best remedy is a subsidy for low-wage employment, paid to employers for every full-time low-wage worker they hire and calibrated to the employee's wage cost to the firm. The higher the wage cost, the lower the subsidy, until it has tapered off to zero. With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid out as direct or indirect labor compensation. People could benefit from the subsidy only by engaging in productive work."

Following this advice, the government could pay, say, Rs 500 per month towards the salary of each worker employed in a factory or a farm. Or government could pay both the employees' and employers' contribution to Provident Fund for all employees. Such policy would lead to reduction of cost of labour. Farmers and industrialists will use less machines and more labour. The consequent increase in commercial activity will generate taxes for the government and the expenditures made on subsidies will be much recouped. A fortuitous cycle of reduced labour cost, increased commercial activity and higher collection of taxes will be established.

The World Bank has given a similar assessment in the World Development Report 2009. The Bank has said that poor rural workers must be encouraged to migrate to the city where new opportunities of commercial employment are being generated. NREGA does exactly the opposite. It holds back the unemployed in the villages artificially. They do not get access to commercial employment and become perpetually dependent on NREGA.

One argument given in favour of NREGA is that it enhances the bargaining power of the workers even if it does not create commercial employment. Workers from Bihar may demand Rs 300 per day from farmers of Punjab instead of Rs 200 previously because they now have Rs 100 available to them in their home under NREGA. This is true. But such bargaining does not help in the long run. Workers of textile mills of Mumbai demanded high wages under the leadership of Datta Samant. The result was that the textile industry moved to Surat. Many factories were relocated outside Bengal because the State Government supported and enhanced the bargaining power of the workers. Farmers in Kerala have abandoned labour-intensive crops like paddy and moved to labour extensive crops like coconut because the bargaining power of workers is high. The import is that an artificial increase in wages is counterproductive. The workers may get high wages today but tomorrow the job itself may go. We can see this happening in the United States today. Automakers are going bankrupt because workers are not willing to accept lower wages.

In the result, NREGA has provided short term political benefits to the Congress, which is wholly deserves, but it is pushing the unemployed into dependence on the government and reducing the opportunities of commercial employment. The government must consider replacing NREGA with an employment subsidy scheme.

Author's address: bharatj@sancharnet.in