I used to ardently support rural employment schemes to reduce poverty. I saw their huge value in droughts, injecting purchasing power into areas hit by income loss. But experience then showed me that such schemes have little long-run impact on poverty. They are good palliatives in a drought, but cannot reduce poverty sustainably. That can be done only by increasing productivity, so that real wages and incomes rise.
Hence I am unenthusiastic about the proposed Employment Guarantee Act (EGA). This promises 100 days of work per year to one person per rural household. The National Advisory Council estimates this will cost Rs 40,000 crore/year (or 1.3% of GDP). Columnists like Sunil Jain and Shankar Acharya worry that the cost could be Rs 150,000 crore (over 4% of GDP) if every rural household applies for work.
My fears are very different. Research on Maharashtra’s Employment Guarantee Scheme (EGS) by Tendulkar and others shows that participation rates are low: poor people have many things to do and are not available for work most of the time. The NAC assumes that 5.5% of rural folk will participate, whereas peak participation in Maharashtra’s EGS was only 3.3%. All-India participation at this level will cost only Rs 22,000 crore/year, not insanely higher than the Rs 10,000 crore or so spent on such schemes in recent years. Many state governments are so incompetent that they return unspent Plan funds every year. Such incompetents will not meet rural employment targets either. If states guarantee compensation to those whom they cannot provide work to, the cost can be high. For that very reason I doubt if the states will agree to a guarantee clause in the proposed legislation.
No, my reservations lie elsewhere. If I thought the money would actually reach the poor, I would happily spend twice as much. Unfortunately little of rural employment money reaches the poor. Rajiv Gandhi estimated that only 15 paise in the rupee gets through. Economists Mahendra Dev and Ajit Ranade put it at 21 paise in the rupee. This is waste parading as poverty alleviation.
As finance minister in 1991-96, Manmohan Singh introduced an Employment Assurance Scheme with exactly the same aim: 100 days work per rural family, initially targeted at backward districts and later extended to the whole country. Did this lead to fiscal bankruptcy? No. Did it provide more jobs? Yes, man-days of work rose from 875 million man-days in 1990-91 to a peak of 1,232 million man-days in 1995-96. Nevertheless the Congress was thrashed in the 1996 election. Clearly, voters did not see this as reform with a human face. Or as a remedy for poverty.
NSSO surveys give us rural poverty ratios in 1987-88, 1993-94, and 1999-00. Budget papers give us man-days of work for those years. Between 1987-88 and 1993-94, man-days soared from 675 m to 1,073 m, but the rural poverty ratio declined very modestly from 39.1% to 37.3%. Then non-Congress governments reduced man-days steadily to just 546 m in 1999-00, yet the rural poverty ratio crashed to 27.1%. Clearly, the connection between rural employment schemes and poverty is very weak.
Bogus claims are made that rural employment schemes build durable assets that increase rural prosperity. If so, decades of rural employment schemes should have provided a pukka road, school building and health clinic in every village. That, alas, is not the case.
I suspect the most sustainable way of reducing poverty is to provide all-weather roads, power (without subsidies) and telecom to every village in India. Then the rural economy will take off, thanks to new economic opportunities. Reducing corruption, ensuring attendance, and improving the administration and courts will reduce poverty too. But this approach will not please politicians and NGOs who want to be seen giving the poor palliatives, rather than curing their ailment.
So, let me propose an alternative give-away. Simply drop the money by helicopter or gas balloon (or even Diwali rocket) over rural areas. The poor will scramble over ridge and valley to gather every note, but it will not be worth the while of the rich, bureaucrats or contractors to do the same. Little will leak to the non-poor.
Many notes will be lost and rot in tanks and fields. Not a total loss: this will curb money supply and inflation. A good innovation would be to mint Rs 5 aluminium coins for helicopter dropping. These will not rust or rot, and can be found by the poor years after they are dropped. Manmohan Singh, please try this in one district and compare poverty outcomes with neighbouring districts having employment schemes. It may prove an eye-opener.