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Making an ass of u and me

October 25, 2004

On the face of it, the National Rural Employment Guarantee Act, proposed by Sonia Gandhi's National Advisory Council, looks really neat.

It is, you're told, completely self-selecting and so only the poor will opt for it though it will be open for the non-poor as well.

It will provide over a crore (10 million) jobs in a year and so take care of a fourth of the country's unemployed (assuming a 10 per cent unemployment rate on a workforce of around 40 crore -- 400 million) and will lift around three-fourths of the rural poor above the poverty line even though, somewhat confusingly, you're also told the scheme will provide jobs to just 5.5 per cent of the total population below the poverty line in rural areas (

So while it is true that the scheme will cost Rs 40,000 crore (Rs 400 billion) a year once it is fully implemented, the NAC paper on the financial implications of the proposed act says this will be under 1 per cent of GDP.

The problem is once you question the scheme's neat little assumptions, you understand the old joke about how people who assume something are making an ass-(of)-u-(and)-me!

Let's take the first assumption -- the scheme being self-selecting since the jobs will involve doing manual labour at the minimum wage, only the poor will opt for it. So, while calculating the cost of the scheme, only the poor households (4 crore -- 40 million) are assumed to opt for it. This is questionable.

Since everyone knows labourers do not get paid the minimum wage a very large part of the time, especially in the off-season, it stands to reason a scheme which promises the minimum wage will be over-subscribed by even the non-poor.

If each rural household participates in the scheme, and only one member is given 100 days' employment as per the scheme, the cost will go up to around Rs 150,000 crore (Rs 1,500 billion) a year.

The scheme assumes Rs 60 of every hundred will be given as wages, while just Rs 40 will be spent on capital costs and administering it, in keeping with other public employment programmes, and assumes no leakages at all since, as NAC member Jairam Ramesh told me, it would be administered by the gram panchayat.

Since the scheme draws its inspiration from a similar one run in Maharashtra, it's instructive to see some evaluations of the latter. I used the one by S Mahendra Dev and Ajit Ranade, for the (lazy) reason this is the one Jairam gave me.

In the Maharashtra case, the duo say the non-labour costs of the scheme are 50 per cent (significantly higher than the NAC's 40 per cent), and for every Rs 100 spent, the poor get just Rs 21.6, a transfer efficiency that's double that achieved in programmes like the PDS (for every Rs 100 spent here, the poor get just Rs 11.2), but still pretty poor.

Dev and Ranade assume a leakage of 20 per cent (in the sense that workers get paid below the guaranteed wage) but if you increase this to even 40 per cent, the scheme's effectiveness is pretty much down to levels of the PDS-kind of schemes.

The reason why I say the leakage could be higher is the official numbers suggest this is the case. According to Planning Commission member Abhijit Sen, in 1999-00, people reported they were working 250 million mandays on 'public works' programmes to the NSS, yet in that year the government spent enough for 500 million mandays!

But what of the point Jairam makes, that since the panchayats will administer it, the leakages will be minimal? Apart from the fact that this sounds like just a new mantra considering just how panchayats are dominated by a few powerful castes, the maths doesn't add up.

Assume half the funds go to the panchayat, as the scheme suggests. So of every Rs 100 spent, Rs 50 goes here. Of this, Rs 25 has to be taken out for capital costs and administrative charges. So, assuming no leakage, the workers get the remaining Rs 25.

In the other Rs 50 that is spent in the manner government departments do, assuming the normal 10-12 per cent reaches the people, the workers will get Rs 3, taking the total to Rs 28 of wages for every Rs 100 spent.

And given that workers will need to sacrifice some other employment to take up the guaranteed wages job, even this figure may need to be reduced.

Clearly the issue that needs to be addressed here is that of capital costs since they suck out 40-50 per cent of the amount immediately. And since no one has really been able to identify the assets (such as irrigation canals) that have been built by such schemes in the past, why spend on capital?

And this is precisely what the Planning Commission is trying to do, to see if it can somehow marry this scheme with other programmes.

So, for instance, if the Planning Commission is clearing a Rs 5,000-crore (Rs 50 billion) rural roads programme with a Rs 2,000-crore (Rs 20 billion) wage component, why not get the wage component from the guaranteed jobs act, and just clear the roads programme as a Rs 3,000-crore (Rs 30 billion) one or increase the capital component to Rs 5,000 crore?

While merging the labour component of one scheme with the capital component of another is a logistical nightmare (more so since the state government will have to legally compensate those who don't get jobs), surely the rural roads programme would have created jobs anyway?

In which case, all the jobs-guarantee programme will effectively do is to serve as an enhanced allocation for existing projects!

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