By Harsh Gupta

    AFP/Getty Images
    Labor shortages have been reported throughout India for farmers and industrialists who have seen prospective employees go instead to the government’s rural jobs program.

    Since it was launched in 2006, the Mahatma Gandhi National Rural Employment Guarantee Scheme has given every willing rural Indian family a public works job for up to 100 days a year.

    Now, changes are being implemented that could dramatically expand the program – and distort its mission.


    The program was founded to curb poverty on the one hand, while creating much-needed rural infrastructure on the other. Rampant corruption has bedeviled it and rural infrastructure remains dilapidated. In part, that’s because a curious, neo-Luddite provision in the program mandates that no contractors or machinery be used in infrastructure creation, lest fewer jobs be created. That suggests the project is more for make-work than public works. After all, to borrow from Milton Friedman, why allow shovels when spoons are available?

    As the program has grown, the government has been looking for ways for its beneficiaries to be protected from high inflation. Rising prices sparked demands that the 100-rupee daily wage in the program be higher in the two thirds of states which have minimum wages above 100 rupees a day.

    Despite having the support of Congress President Sonia Gandhi, the suggestion was rejected by Prime Minister Manmohan Singh. But Mr. Singh, on New Year’s Eve, took a different tack: He linked the program’s daily wage to cost of living increases for agricultural laborers with immediate effect.

    With the prospect of higher government wages, the program is likely to crowd out the private labor market. Already, labor shortages have been reported throughout India for farmers and industrialists who have seen prospective employees go instead to the government’s rural jobs program.

    Some want the government to go even further. Economist Jean Dreze, writing in the Hindu recently proposed that the wage be linked to inflation plus real per-capita growth.

    Such moves could result in ever-increasing MGNREGS wages, incentivizing villagers to reduce private sector work and instead enroll in MGNREGS or work longer under the program. In effect, we will have a significant chunk of rural India becoming employees of the government.

    Is a public union — of a size that the world has never seen before — being born in front of our eyes?

    It seems so. According to the Ministry of Rural Development 43 million rural Indian families, or almost one-third of rural India, benefited from the program in 2009-10. Because of the wage increases and/or an economic slowdown, it is conceivable that around one hundred million families could be working part-time for the government in the future even if they do not get paid the full wage because of corruption.

    Including their dependents, the number of citizens then having an interest in ever higher MGNREGS wages would be around, hold your breath, five hundred million. This is manna from heaven for socialists and a nightmare for taxpayers, which would include the Indian urban poor, who like everybody else, pay consumption taxes.

    These fears are not theoretical. Kerala has already allowed the formation of MGNREGS workers’ unions. R Chandrasekharan, president of Kerala’s biggest Congress-affiliated labor union, already has demanded that both the number of guaranteed workdays as well as the base wage, be increased by at least half.

    Mr. Chandrasekharan is also demanding pensions and housing for all MGNREGS workers. Less than 1% of GDP is currently being spent on this program but this number could easily multiply if MGNREGS unions open up in other states.

    India, which already has one of the worst debt-to-GDP ratios among major emerging economies, cannot afford this. Moreover, the otherwise-positive phenomenon of cheap labor vanishing is unwelcome in this case because it is the result of unsustainable spending. Instead of upgrading the skills of citizens, the government has been deficit-spending to dig ditches and is seriously risking slower growth and higher inflation.

    Left-leaning economists and activists — like Nobel Prize-winning economist Amartya Sen — have long called for an ever-more generous legal entitlement to employment. The reason, according to them, is that free-market economics care about growth, not human beings.

    More specifically, they say, production of adequate necessities like food — in which India has been self-sufficient for decades — could still cause famine because the poor might simply not be able to afford the basics. Those are fair points and it is undeniable that chronic malnutrition remains a serious problem in India.

    But that calls for market reforms: subsidize food stamps instead of government distribution; liberalize trade in agriculture so that farmers can benefit from higher prices; and have welfare programs which are agnostic to a citizen’s profession. Helping villagers and farmers — rather than the poor generally — artificially keeps more people in villages and farms, decreasing land holdings as well as agricultural productivity.

    More specifically, within MGNREGS, there is a need to separate the infrastructure and employment creation aspects. If building better infrastructure needs large machinery and contractors, so be it. All contractors could be required to pay villagers at least the program’s current wage.

    But then what will happen to the jobs? This problem can be solved by giving all the villagers an “opt-out” clause of getting, say, half the wage by not working at all. This opt-out could be contingent upon the family’s children being in school, being vaccinated and so on. That would partially convert this make-work program, without much political opposition, into a conditional cash transfer program, an idea that has been very successful in Latin America.

    Indeed, such an opt-out already exists in the form of unemployment compensation within MGNREGS. If within 15 days of applying for work, the villager does not get hired under the program, he is entitled to one third to one half of the wage without working.

    But since the federal government funds the entire wage expense, and forces the states to pay the entire unemployment compensation, states have just added MGNREGS workers instead of paying unemployment compensation.

    Federal funding of wages and unemployment in the same ratio would automatically incentivize the states to save money by paying out “unemployment compensation” in those villages where currently projects are not needed or viable, and hiring contractors and villagers only where genuine infrastructure projects are needed.

    Many villagers would gladly not do hard physical labor in exchange for half the wage. Finally, if some states want to pay higher than the current wage, they can but they should not expect the central government to fund the difference.

    Such common sense reforms would save the taxpayers money, promote industry and decrease poverty faster by keeping MGNREGS enrollment as a genuine “last ditch” option for the poor. Otherwise, the mother of all

    unions could sabotage the Indian growth story.

    - Harsh Gupta is a Kolkata-based entrepreneur and writer. He graduated with a degree in economics from Dartmouth College, and has worked on developmental projects in rural Rajasthan and Delhi’s slums.