India’s Rural Employment Guarantee Scheme

The Economist writes:

The appeal of poor-law relief, according to John Stuart Mill, was that it is available to everybody [but] it leaves to every one a strong motive to do without it if he can. The state does not test a person’s means, but by offering low wages in return for hard work it deters those who can support themselves. In theory, wages should be close to, but slightly below, the market wage. They should, as Mill said, give the greatest amount of needful help, with the smallest encouragement to undue reliance on it.

The real value of the public works lies not in the orchards they plant, but in the safety net they provide. The rural poor, with little access to credit or insurance, have few opportunities to smooth their consumption in the face of misfortune. As a result, they tend to be conservative in their farming decisions, eschewing productive ventures that might raise the expected value of their income, but also raise its variance. Despite the clear risk of corruption by the officials administering it, an employment guarantee could give the poor something to fall back on. This might encourage farmers to take productive risks, such as experimenting with high-yielding seed varieties. It might spare them from distress sales of draught animals, keep them from pulling their children out of school and stop them from migrating to city slums.

Employment guarantees pose a policy trilemma. In principle, the Indian government might like to achieve three goals: an unconditional guarantee of employment, at the minimum wage, without busting the budget. In practice, it can achieve any two of those three. If it offers above-market wages, it can contain the fiscal cost only by diluting the guarantee.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.