Commentary

Job Law Can Sharply Cut India’s slow-growing agriculture behind

– particularly as crop production growth
has slowed in the 1990s.

Poverty This Decade The Employment Guarantee

Agriculture still accounts for 59 per cent
A rural employment guarantee programme will yield immense of total employment in India. While in the
benefits. Labour-intensity can be high in watershed development, medium-run, transfer of labour out of
agriculture will be necessary, direct action
land regeneration, and prevention of soil erosion. A jobs by the government could dramatically
programme that focuses on such work would not only protect the reduce rural poverty in India within the
environment, it would enhance land productivity and promote next five years. The UPA government is
rural employment in the future. Such a plan would also have to shortly introduce a bill providing an
positive second-round effects on household incomes, by raising annual minimum guarantee of employ-
ment to poor households. The original
agricultural wages and investment in human capital. Besides, proposal would have given a statutory
improving watershed development could reduce damage right to 100 days a year of employment
to life and property caused by frequent flooding. To argue at the minimum wage in each state to one
against the employment guarantee is therefore being penny wise person from every household. The new
and pound foolish. draft, unfortunately, removes the statutory
right and contains no time horizon for the
scheme to cover the entire country. It will
SANTOSH MEHROTRA China’s poverty declined dramatically in initially cover the 150 poorest districts in
the first decade after economic reforms the country.

T
he goal of halving poverty in the
world by 2015 agreed at a world
summit at the United Nations in
2000 is unlikely to be achieved, as two
UN reports – one by the Food and Agri-
cultural Organisation, noting that the
number of hungry people is rising, and
another by the International Labour
Organisation – warned this week. The
only reason why globally there has been
some progress on this goal so far is be-
cause China and India have succeeded in
increasing economic growth rates and re-
ducing poverty – as the Human Develop-
ment Report noted last year. China has had
such significant growth and poverty re-
duction in the recent past that progress in
poverty reduction will be much slower in
the coming decade. However, if India fails
to make serious inroads against poverty,
the one goal of the many Millennium
Development Goals on which the world
seems on track, will also not be achieved.
One of the most important ways in which
India’s growth experience in the last two
decades contrasts with China’s is that China
managed to increase employment rapidly
– mostly in manufacturing and construc-
tion. Industrial employment accounts for
22 per cent of China’a labour force,
compared to 16 per cent in India (2000).
because of expanding township and vil-
lage enterprises (TVEs), which absorbed
surplus labour in rural areas. While in
1978 just under one-third of all manu-
facturing employment took place in the
countryside, by 2000 this had risen to half
[Mehrotra 2004].
India’s situation has to be contrasted
with that of China. Despite rapid growth
and increases in income inequality in
both, in China poverty declined to barely
30-40 million people, average incomes
rose, and education levels and life expect-
ancy rose to levels much higher than
India’s. Hence, rising income inequalities
in the two does not make their social
situation comparable. Although India
managed to reduce poverty in the 1990s,
increasing inequality could lead to serious
social tensions and urban turbulence –
frightening away investors, just as foreign
investment has begun to climb.
Only employment-intensive growth will
ensure that poverty will decline and in-
equality does not increase. However, the
employment-elasticity of manufacturing
has fallen sharply in the 1990s. The only
reason employment has been growing as
rapidly as the labour force is on account
of growth in services. But that has left the
majority of those dependent upon
In a low income country, the poor cannot
afford to be unemployed; most of the poor
in India are the working poor. Most poor
families are in casual employment or self-
employed, while those with regular em-
ployment are least likely to be poor. What
the employment guarantee act will do is
ensure at least 100 days a year of regular
employment to the poor – eliminating a
basis of poverty. On the basis of a popu-
lation-weighted average minimum wage
of Rs 60 per day, 100 days work will raise
incomes by Rs 6,000 a year for poor
households. That could potentially raise
two-thirds of India’s population of poor
above the poverty line.
The Costs
How much will it cost the national
exchequer? Dreze (2004) has estimated
that the total cost of the programme with
phased implementation will rise from 0.5
per cent of GDP in the first year (2005),
at 2004 prices, to 1 per cent of GDP in
the last year of the inception phase (2008).
Thereafter, the ratio will decrease, as the
number of households below the poverty
line decreases.
The scheme, and these costs, are mo-
delled on a similar scheme which has been

Economic and Political Weekly December 18, 2004 5357

implemented successfully for 20 years in
Maharashtra state. But the preceding cal-
culations assume a labour-material ratio of
60:40. The corresponding ratio is
much lower in Maharashtra, and unit
costs could come down with more labour-
intensity.
The Benefits
In fact, labour-intensity can be high in
such work as watershed development, land
regeneration, and prevention of soil ero-
sion. This would not only protect the
environment, it would enhance land pro-
ductivity and promote rural employment
in the future.
Such a plan would have positive second-
round effects on household incomes, by
raising agricultural wages and investment
in human capital. One of the major reasons
that the children of poor parents drop out of
school is because the parents cannot afford
the direct and indirect costs of schooling;
raising family incomes would reduce school
dropouts. Add to this the increase in land
productivity – together these can have
profound economic growth effects.
Besides, improving watershed develop-
ment could reduce damage to life and
property caused by frequent flooding,
and save future costs in government flood
relief. To argue against the employment
guarantee is being penny wise and
pound foolish.
Besides, India has to raise its tax to GDP
ratio. Compared to central tax revenues for
low-income countries of 14.1 per cent of
GDP over 1990-2001, India’s centre col-
lected in 2001-02 barely 8.2 per cent and
in 2003-04 only 9.3 per cent of GDP.
Compare that to nearly 22 per cent in China
in 2003. Besides, the tax-revenue ratio to
GDP rises with rising income: it is 18.5
per cent for lower-middle income coun-
tries, and 23.1 per cent for upper-middle
income countries [IMF 2004]. Despite
rising incomes in India, the ratio of central
taxes to GDP has actually fallen from 10.6
per cent in 1987/88 to 9.3 per cent now
[GoI 2003]. Just raising the central
government’s tax to GDP ratio to its late
1980s level would more than pay for the
employment guarantee act.
Labour Absorption in
the Long Run
The implementation of the bill would
not obviate the need for transfer of labour
out of agriculture, where the structure of
5358
employment is such that few have regular
employment; most are self-employed or
casual labourers. It is necessary that much
of the new regular wage jobs are for low-
skilled workers, since casual workers have
only 1.8 years and self-employed only 3.7
years of education; by contrast, regular
employees have 7.8 years of education
[Ghose 2004]. This implies a growth
strategy based on exports of manufactures,
but also production of low-skill intensity
goods for the huge and growing domestic
market.
But given the large numbers involved,
even a fast transfer out of agriculture will
not pull up all the working poor out of
poverty. Hence, direct employment cre-
ation through the employment guarantee
act is an essential component of policy.
Besides, the maximum attainable share
of industry in total employment in late
industrialisers is lower than what it was
in the now industrialised countries at their
manufacturing peak. In the UK it was 55
per cent (1901), in Japan 37 per cent (1973)
and in Korea 33 per cent (1994). In China
it is 22 per cent (2000) and in India 16 per
cent [Ghose 2004]. Late industrialisers
borrow technology from early indus-
trialisers, and the labour-intensity of
technology always declines with time.
Hence, regular wage employment in total
employment will not rise significantly. Thus
the share of self-employment will perforce
remain significant into the foreseeable
future in most developing countries, in-
cluding India. This underlines even further
the need for reducing the scope of casual
labour, and hence the need for an employ-
ment guarantee as now being discussed in
India. It is estimated that a time bound
statutory guarantee of employment to the
poor would ensure that two-thirds of poor
households in rural India would be able
to cross the poverty line with an additional
income of Rs 6,000 per year.
Ensuring Transparency in Use
of Funds
Critics have argued that the act would
expand opportunity for bureaucratic
corruption. However, is that it has been
demonstrated in cases around the
country that effective monitoring by the
community of government spending is
not only possible, it is effective. Ensuring
such effective monitoring requires: the right
to information and social audits. Right to
information laws have been enacted by
several states such as Delhi, Rajasthan,
Economic and Political Weekly December 18, 2004
Tamil Nadu, Karnataka, Maharashtra and
Goa and some states like Madhya Pradesh
and Uttar Pradesh have passed executive
orders for providing access to infor-
mation. A significant achievement has also
been the Freedom of Information (FOI)
Act of the government of India in January
2003 [NCPRI 2004]. It empowers every
citizen with the right to obtain information
from the government. And civil society
organisations like the MKSS have
demonstrated in Delhi and Rajasthan
how social audits can bring bureaucratic
corruption to heal, armed with the right
to information. Hence, the critics risk
being perceived as raising a red
herring. EPW
[The views expressed here are personal and cannot
be attributed to the organisation with which the
writer is associated.]
References
Dreze, J (2004): ‘Financial Implications of an
Employment Guarantee Act: Preliminary
Estimates’, mimeo, National Advisory Council,
New Delhi.
Ghose, A (2004): ‘The Employment Challenge in
India’, Economic and Political Weekly,
November 27.
GoI (2003): The Tenth Five Year Plan, Vol 1,
Government of India, New Delhi.
IMF, Global Monitoring Report 2004,
International Monetary Fund, Washington,
DC.
Mehrotra, S (2004): ‘China: UN Country Common
Assessment’, Draft, Beijing.
NCPRI (2004): ‘National Campaign for
People’s Right to Information’, www.rightto-
information.info, accessed December 11.
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