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India’s rural employment guarantee is a milestone in social policy and employment creation. The Mahatma Gandhi National Rural Employment Guarantee Act was mandated in 2005 to implement an ambitious, demand-driven employment-creation program to benefit the rural poor through projects that improve agricultural productivity and alleviate land degradation. Guaranteeing the right of rural households to 100 days of unskilled manual work, the program’s size sets a worldwide precedent. It has achieved impressive results, but the act continues to pose immense design and management challenges.

Important Facts

• India faces persistent poverty and inequality despite burgeoning growth. Between 1988 and 2005 the country’s GDP almost tripled, but its poverty rate only decreased by 30 percent, underscoring the need for poverty reduction policies.
   
• Under the program, members of 50 million households worked a total of 2.5 billion days in 2011.
   
• The act looks to empower women, widen opportunities for marginalized population groups, and reinvigorate community decisionmaking bodies.
   
• The program is meant to operate transparently and fight corruption, but corruption has been seen in the act’s implementation.

Key Findings

• The act is having a significant impact on the lives of the poor with rural wages increasing, but its effectiveness varies according to activity and location.
   
• Simulations using an economy-wide model indicate that the act has a positive macroeconomic impact, leading to increases in GDP and trade.
   
• As the program shifts purchasing power from the urban rich to the rural poor, the structure of demand changes. Economic activity in agriculture, processed food, and light manufacturing increases and activity in heavy manufacturing and services declines. Likewise, the demand for unskilled labor in urban and especially rural areas increases, while the demand for mainly urban skilled labor decreases.
   
• Poor households benefit from added employment opportunities, while high-income households might suffer from weaker demand.
   
• The act is likely increasing land productivity, which boosts GDP and opens the opportunity to introduce incentives to investment while keeping tax rates constant.
   
• Given India’s weak institutional setting, a new way of doing business is necessary to implement the act’s detailed and ambitious procedures. Institutions must solidify processes for making information transparently available, and communities need to be involved in creating and managing projects.
   
• The act is a work in progress that needs ongoing evaluation to fully succeed and keep the corruption affecting the program’s implementation in check.

Introduction

On August 25, 2005, the Indian parliament enacted a law guaranteeing the right of rural households to a minimum of 100 days of work; this important piece of legislation was later renamed the Mahatma Gandhi National Rural Employment Guarantee Act.¹ In many ways, the act represents a milestone in social policy and employment creation. Its rights-based approach, social inclusion features, reliance on local self-government, and focus on livelihood security make it a very important public endeavor. Its size has no precedent nationally or internationally, posing important design and management challenges.

The act mandated the implementation of an ambitious, demand-driven employment creation program aiming to benefit the rural poor with the income provided by jobs paying a socially acceptable wage and with projects to improve productivity in agriculture and alleviate land degradation. It also set important social goals, such as empowering women and widening opportunities for marginalized population groups. At the same time, the act seeks to reinvigorate community decisionmaking bodies, operate transparently, and fight corruption. The act’s timing also adds distinction: The legislation came after several years of high economic growth, the “India Shining” years, that had failed to significantly improve the living conditions of the poor.

As the act was implemented and its program thus began to revamp prior employment programs, job creation accelerated from less than 1 billion workdays distributed among 20 million households in the act’s first year of operation, 2006–2007, to 2.5 billion workdays for 50 million households in 2010–2011. Any initiative of such breadth and ambition cannot be expected to operate with satisfactory standards after only a few years. There are reports, by both critics and supporters, indicating instances in which the program’s resources have been diverted to the pockets of local elites, that the poor have only received some of the payments they were supposed to have gotten for their work, that the work females do in the program is paid to their husbands, and that the program’s projects are inadequate, not maintained, or simply not completed, and hence are incapable of effectively increasing agricultural productivity. Some of the reports highlighting failures are part of the program’s own auditing provisions. The fact that information on these failures, which are to be expected, is publicly available might contribute to improving the act’s design and above all its implementation. In this case, evidence of deficient performance is potentially a good sign. There are also positive results. Both a number of the act’s own program audits and independent studies indicate that jobs are in fact being created, that wages are being paid, that females are participating in the program and directly receiving wage payments, that the projects the program is undertaking are considered useful by their communities, that overall wages have increased, and that living conditions have improved. In particular, a recent India-wide household survey offers evidence that the program is reaching and benefiting the poor but does not seem to be effectively guaranteeing jobs. Nevertheless, there is no evaluation instrument proportional to the magnitude of the program that can give a consistent response to the questions the program has raised.

This study seeks to shed light from a different angle on some of the questions the evaluations so far have concentrated on. It assumes that the program under the Rural Employment Act is effectively creating jobs, that the jobs pay the official program wage and are mainly being taken by the rural poor, and that the nation’s castes and tribes are participating in these jobs in proportions similar to those stated in the program’s official figures. It then asks, first, what are the macroeconomic and distributional implications of running an employment generation program like the Rural Employment Act. Second, it explores the economic and distributional consequences of partially diverting the program benefits away from the poorest rural households. And, third, it assesses the economic and distribution effects of contracting the program to its initial dimensions or significantly expanding it beyond its current size. Taking a long-term perspective, the study then details the economic and distributional effects of the program effectively increasing land productivity, and looks into the consequences of varying the size of the increase in productivity.

It finds that the program has had a positive impact on economic activity, and since its inception, has triggered effects that benefit the poor beyond the immediate and direct impact of wage payments to the poor participating in the program. It finds that the Act’s employment creation brings benefits to the economy as a whole, as productive activity expands, and that significantly redistributes welfare toward the rural poor and marginally towards the urban poor. These increases in welfare are made possible by moderate reductions in the welfare of the rural and urban rich. It also finds that the long-term effects of the potential increases in agriculture the Act might be bringing about not only expand economic activity but also increase welfare among all population groups; however, its distributional effects are not positive, for the increase in welfare is be higher for the rich than the poor. These impacts are all significant, yet small, in part because the program—as impressive as it might be—is still very small when compared to the millions of people engaged in the labor markets.

India: Growth, Poverty, and Inequality

India is the second-largest country in the world as measured by population, with about 1.2 billion people. It is also an emerging economic power, with a strong growth record spreading over the last twenty years. In terms of size, India is the tenth- or fourth-largest economy in the world, depending on whether market exchange rates or purchasing power parity rates are used to translate local currency to dollars. Either way, the size of India’s economy clearly stands out among emerging market and neighboring economies (figure 1.1, left graph). Yet, at market exchange rates, India’s income per capita is only $1,330, and thus it is a country that has just migrated from the “low-income” to “low-middle-income” group of countries. Regionally, its income per capita is the lowest among the emerging market economies, similar to the South Asian average and nearly double that of Bangladesh (figure 1.1, right graph).

Economic Growth

Since India gained its independence in 1947, policymakers in the country have considered economic growth and poverty eradication as their two major objectives. During the first three decades after independence, the Indian economy grew at the modest rate of 3.5 percent per year. However, faced with a rapidly growing population (at 2 percent per year), the growth rate was clearly insufficient to make a significant dent in poverty (figure 1.2). The 1980s marked a turnabout in economic conditions. During that decade, economic growth accelerated to a rate of 5.5 percent per year, which resulted in increases in per capita income on the order of 3.5 percent per year. This opened the door for significant poverty reduction. The 1990s removal of widespread government controls on trade and industry and the long-lasting and rapid expansion of world markets resulted in the acceleration of India’s growth. More recently, the economy proved resilient to a variety of shocks. Droughts, high international oil prices, and the global recession did not prevent the economy from growing at rates above 8 percent between 2009 and 2012. The performance of the Indian economy, along with those of other emerging market countries, lost steam during 2011–2012, and the outlook is not as bright. The growth forecast for the 2012–2013 fiscal year is 6.5 percent.

As the pace of growth has accelerated over the last thirty years, the nation’s economic structure has undergone a transformation toward a service-based economy. From representing about 30 percent of the economy in 1960, services came to account for almost 60 percent of India’s gross domestic product (GDP) in 2010. India is now widely recognized as a strong world competitor in skill-based services such as information technology. And while the importance of industry has also increased, from less than 20 percent to just about 30 percent, that of agriculture has plummeted—from representing slightly more than 50 percent in 1960 to less than 20 percent in 2010. The shift from agriculture to industry and services is the normal transformation accompanying a country’s unfolding economic development. However, as has been the case in other developing economies, India’s economic transformation has come at the cost of lags in agriculture’s productive capacity and rural living standards.

Poverty and Inequality

Poverty in India has been falling since 1983 at a varying pace. While poverty reduction was particularly fast during the years that preceded the passage of the Rural Employment Act, this fast reduction did not compare with the concurrent acceleration of growth. The country’s success in increasing its growth rate did not equate with the pace at which poverty was being reduced. Between 1973–1974 and 1987–1988, GDP almost doubled and poverty decreased by 30 percent, but between 1987–1988 and 2004–2005 poverty decreased again by about 30 percent and GDP almost tripled. Further, according to government figures, poverty not only continued to decrease between 2004–2005 and 2009–2010, but it did so at a faster pace.² As in many other countries, faster growth was accompanied by rising inequality. India’s Gini coefficient, a widely used measure of inequality, increased from 0.286 in 1993–1994 to 0.305 in 2004–2005 in rural areas, and from 0.343 to 0.375 in urban areas.

India’s rising inequality also saw the widening of regional disparities among its states. Between the 1990s and the 2000s, the difference between the states’ income per capita and national income per capita clearly increased.³ By the mid-2000s, strong differences in well-being were evident. The proportion of the poor in a state’s population ranged between 3 percent and 57 percent. Whereas in four highly equitable states fewer than one in ten people were poor, in fourteen other states more than one in three people were poor. The four equitable states accounted for 2 percent of all Indian poor people, whereas the fourteen other states accounted for 80 percent. In two states, Orissa and Bihar, more than half the population is poor, accounting for almost 20 percent of the country’s poor.

Social disparity in India traces back to historical discrimination against and isolation of particular population groups from mainstream society. According to the Indian constitution, official data classify the population into four groups: the scheduled tribes (STs), the scheduled castes (SCs), other backward classes (OBCs), and other population groups (Others). At about the time of the passage of the Rural Employment Act, these groups respectively accounted for 8, 20, 41, and 31 percent of the total population. They were and remain at the bottom of the social and economic ladder and thus include large concentrations of poor people. In rural areas, respectively, about 49, 40, and 30 percent of the ST, SC, and OBC households had consumption expenditures lower than 410 Rupees, compared with 20 percent of Others. Deprived population groups also have limited access to land. The group with the most limited access to cultivable land is the SCs, whereas Others have the best access. When the act became law, about three-quarters of ST households had land possessions smaller than 0.4 hectare; in contrast, the proportions for SCs, OBCs, and Others are respectively 46, 56, and 52 percent. The more ample access to land of Others is best seen in the proportion of them with land possessions bigger than 4 hectares. Though only 1 percent of people in the STs have land possessions larger than 4 hectares, 6 percent of Others have land possession bigger than 4 hectares; in turn, 3 percent and 4 percent of the SCs and OBCs have lands bigger than this size.⁴

Employment Conditions and Policies

Living standards critically depend on employment opportunities and the effectiveness of jobs to generate earnings. Open unemployment rates are low in India, at 2.5 and 5.3 percent in rural and urban areas, respectively. Rather than a sign of abundant employment opportunities, particularly in rural areas, such low unemployment rates confirm the well-known dictum that the poor cannot afford to be unemployed and suggest that low labor force participation might be a critical issue. India’s employment rate—that is, the proportion of the population that actually works—is indeed low. It is low among men, but it is particularly low among women; the rate for males is 55 percent, regardless of the area, whereas female rates are 33 percent and 17 percent in rural and urban areas, respectively.⁵

Having a job or being in possession of land does not ensure a way out of poverty. Wages were and are low in rural areas, and they are particularly low for women. At the extreme, the mean wage of a female illiterate living in rural areas is less than one-tenth of the mean wage of a male worker with a university education living in a city.⁶ In a country where the majority of people still work in agriculture, low agricultural productivity is an important determinant of poverty. Rural workers either work as employees in farms for a low wage or squeeze a living out of small and low-quality landholdings.

Employment has been an important consideration in the Indian economic policy discourse. However, its importance in the narrative of policies has lagged behind its relevance in development plans. During the initial decades of development planning, the goal of achieving the maximum possible economic growth and complementary special considerations for the labor-intensive small enterprise sector were expected to substantially improve employment conditions. The growth of the small enterprise sector was encouraged by reserving the production of certain goods to this sector and by providing fiscal concessions. Aside from these policies, employment generation was effectively treated as a side outcome of policies promoting growth and the change in the production structure.⁷

In the face of persistently poor living conditions in rural areas, the government added to the small toolbox of employment-minded policies the design and implementation of employment generation programs, with a focus on low-income groups. The Seventh Five-Year Plan (1985–1990) and Ninth Five-Year Plan (1997–2002) clearly identified productive employment generation as one of the major objectives of the plans, but the overall policy approach to job creation was largely residual. Job creation policies supplementing the plan’s emphasis on growth included the promotion of labor-intensive sectors and two major employment creation programs, the Sampoorna Grameen Rozgar Yojana and the National Food for Work Program. In comparison with the Rural Employment Act, these two programs were quite limited.⁸

The Mahatma Gandhi National Rural Employment Guarantee Act

The Act

The 2005 Mahatma Gandhi National Rural Employment Guarantee Act guarantees a minimum of 100 days of paid employment to rural households during a financial year. The hope is that by making such additional employment available, the living conditions of the rural poor will improve. Building on India’s long-term experience with employment programs, the act adopted a self-targeting mechanism to reach the poor. By specifying that work must be limited to manual tasks that only call for basic skills, and that work is to be remunerated at the state’s minimum wage, the universal right that the act establishes becomes a policy that reaches the poor through self-selection.

Although the act does not explicitly indicate a time of the year when work should take place, it expects the program to function primarily during the agricultural lean season because it is during this time that work is scarce in villages and the poor are in desperate search of ways to cope. In the absence of jobs, meager food reserves and no savings lead many people to accept the economic and social costs of migrating, often only to find a low-paying job far from home. The absence of jobs might also lead poor people to sell valuable assets to secure food, at the cost of undermining their capacity to sustain living conditions in the future, or/and incur burdensome debts that might pile on top of prior liabilities. Such flexible employment generation projects might provide timely support to sustain poor people’s livelihoods during the agricultural lean season.

For the right to work to be effective, the program under the Rural Employment Act needs to ensure that jobs are made available in a context where poor people find them attractive. On the edge of survival, the costs of taking a job need to be considered carefully. In the absence of child care facilities, women with children might not be able to take the guaranteed jobs even if the additional income is much needed. The act stipulates that, when needed, work sites must have child care facilities. It also calls for work sites to provide drinking water, shady places for resting, and first aid kits. Without these amenities, poor people might not find it advantageous to take these guaranteed jobs. Also important is the fact that the act specifies that work must be provided within a 5-kilometer radius of villages; if work takes place at sites that are further away, transportation costs must be added to the workers’ wages.

In addition to job creation, the act also seeks to increase productivity in agriculture, improve the management of the environment, and facilitate access to markets. The act specifies that work made available must fall within the following categories: (1) water conservation and water harvesting; (2) drought proofing, including plantation and afforestation; (3) irrigation canals, including micro and minor irrigation works; (4) flood control and levees; (5) land development and; (6) rural connectivity. Seeking to ensure that projects intensively create jobs, the act stipulates that projects must allocate at least 60 percent of their total budget to wages and forbids the use of contractors. The act is not a rural development program and does not contemplate building complex development projects.

Social inclusion and gender equality rank high among the act’s objectives, under which a minimum of one-third of the jobs should be made available to women. It also aims to reach deprived groups, such as the scheduled castes and scheduled tribes. However, the act does not specify a target rate for the participation of these groups. Instead, it takes two action paths: It promotes wide dissemination of information and transparency in its implementation, and it requires that the participation of these groups in the program be regularly reported. Furthermore, it specifies that minor irrigation, horticulture, and land development projects can be undertaken on the lands of deprived population groups.⁹

Empowering the poor and halting corruption are two closely interlinked actions that lead to the alleviation of poverty. Drawing from India’s extensive experience, the act takes a step forward to empower the poor and aims to halt the corruption that has plagued the country’s social policies. The act and its accompanying guidelines make elaborate provisions to give the poor control over decisions regarding public works carried out under the act. A key provision places the selection and monitoring of works in communities, namely in the hands of the gram sabhas and panchayats.¹⁰ Also key among its anticorruption and empowering provisions are those related to job cards, which rural dwellers must request to become beneficiaries. Job cards are granted after verifying that the name and address of the person are correct and that the applicant exceeds the minimum legal age to work. With a job card, rural dwellers can make a submission for the number of days of work of their choice. Thus, job cards open the route to the collection of relevant data on the implementation of the program—they allow tracking submissions for work, the number of days worked, and the wages that are received. To avoid forgery, the act specifies that the job card must stay with the worker and that the program administration must keep a copy. In addition to these measures, the program promotes transparency by mandating that “muster rolls,” records of work undertaken and wages paid, are all publicly available at the work site. The act also provides for periodic social audits and the setting up of vigilance committees in villages.

The costs of the act’s program are shared between the federal and state governments. The central government finances the entire wage payroll of the unskilled workers, 75 percent of the materials costs, and 75 percent of the wage bill of the skilled workers. State governments cover the remaining 25 percent of the materials costs and the skilled workers’ wage bill, and also 100 percent of unemployment allowance in case of failure to provide the requested job.¹¹

The Unfolding of the Program

The Rural Employment Act began to be implemented on February 2, 2006. In its first phase, it covered the 200 most backward rural districts; in its second phase, it covered 330 districts. All rural districts were reached during the third phase of implementation (figure 2.1). In terms of jobs, during the first year of operation the program created 1 billion person-days of work that benefited 21 million households. By 2009–2010 the program was giving 2.6 billion person-days of work to the benefit of 55 million households, more than double the initial figure. The act also increased the average number of days of work it provides to households, from 43 person-days per household in its initial year to 50 person-days of work per household in 2009–2010. The size and scope of the program is unprecedented in the history of India’s social programs. In the last two years, the program has decreased in size. It will be important to watch closely to see whether this is indeed a new trend or simply a temporary slump.

The participation of women in the Rural Employment Act’s program has been remarkable. From the beginning, females’ involvement in the program has been well above the minimum prescribed quota of one-third and participation has increased over time. In 2006–2007, females already accounted for 38 percent of the workdays, and by 2008–2009 their participation had increased to 48 percent and has remained there since then (figure 2. 2). Conversely, the program’s delivery on its inclusion commitments to deprived population groups is less encouraging. Although the participation of SC households has increased for the most part, that of the ST households started at a high proportion but decreased during the first three years of its implementation. Note that there was a large decline in the share represented by SCs in 2011–2012.

An act that gives a right to work and promotes social inclusion should aim to pay the same wage everywhere (once differences in living costs are taken into account). In parallel to the implementation of the Rural Employment Act, the national government has embarked on the equalization of states’ minimum wages across the country. If in 2006 states’ minimum wages ranged between 40 and 90 rupees, with few exceptions, in 2010 most state minimum wages ranged between 120 and 140 rupees—a significant reduction in the spread (figure 2.3). Effectively equalizing regional wages is not an easy task, for there are regional differences in the cost of living that should be taken into account. Nevertheless, the aligning of nominal state minimum wages to the top is likely to have contributed to social inclusion.¹²

To increase productivity in agriculture and improve the management of the environment, the Rural Employment Act has concentrated its efforts on water and land management projects. Since its implementation, these two types of projects have represented more than two-thirds of the works officially reported as completed, but the importance of land management has increased from 20 to 30 percent (figure 2.4). Prominent among water management projects are those oriented toward conservation, harvesting, and irrigation.

The budget program increased as employment creation expanded, but the burden on the economy only increased in the first three years; measured by the ratio of the program budget to GDP, the program reached a peak budget of 0.6 percent of GDP in 2009–2010 (figure 2.5). The fall in the proportion it represents in GDP after that year is due to both the relative stagnation of the program budget and continued economic growth. If the current slowdown in economic growth continues, it is possible that the burden of the program will rise back to its earlier 2008–2009 level.¹³

The Impact of the Program

Although there are no systematic, nationally representative data independent of the program (and hence there has been no comprehensive evaluation of the program under the Rural Employment Act) there is evidence indicating that the program is succeeding in reducing poverty; but the data also indicate that the effectiveness of the program varies widely. Evidence includes the administrative records of the program, independent studies by academic institutions, the act’s social audits, and the 2009–2010 National Household Survey. In general, the evidence tends to suggest that the program is having a significant impact on the lives of the poor but also that its performance varies significantly according to the specific feature under scrutiny and the geographical location. Independent studies and social audits detail weaknesses and failures, which in many cases raise serious concerns, but they also suggest that on the whole the program is significantly contributing to poverty reduction. The 2009–2010 National Household Survey data confirm that the program is reaching the poor and is making progress in increasing social inclusion, with regard to the participation of both deprived social groups and women, and also confirms the strong variance in the degree to which the program accomplishes some of its objectives across states.¹⁴

Independent studies and social audits suggest that income in villages has increased since the inception of the program, with the increases varying from the very small to the significant, on the order of 20 percent of annual income. Expectedly, studies report that added income has been used for food consumption, but also to cover education and health expenses as well as the repayment of household debt. Of particular importance, the rise in income earned locally has a