India’s poor law

Source: The Economist

During the famine of 1877-79 in India, the British rulers felt that they had provided too much aid to the Indian people and as a result they felt that the citizens may end up demanding relief at all times.

Although the Indian states for many decades had public work schemes, the state of Maharashtra went a step further in the drought of 1972 and introduced a scheme whereby the people were guaranteed employment at the legal minimum wage. Today’s coalition government in India, the United Progressive Alliance (UPA) has devised similar measures this time round by extending a similar guarantee to the nation.

This may represent India’s introduction of a social safety net but others feel that this new idea will further strain India’s current budget deficit and will reawaken sentiments felt at the time of the famine in 1877, where people would expect relief at all times.

John Stuart Mill said on poor-law relief that it is “available to everybody [but] it leaves to every one a strong motive to do without it if he can”. Through the offer of low wages for hard work, the poor-law would deter those who can support themselves. In theory, the wages should be slightly below the market equilibrium wage.

In 1985, the guarantee of work meant that workers in times of hardship joined the schemes but when things were better as a result of a better harvest for example, they left.

Although the public work schemes did not have much long term benefit in terms of use as for example most roads built by the schemes were washed away by the next year, we need to understand that these jobs provided a safety net for the people. Despite lacking in real value, the work schemes gave the poor something to fall back on. As a result, they felt safer in taking risks such as experiment with different varieties of seeds.

It would be all well and good if the UPA were able to guarantee employment without any negative financial implications. It inherited a budget deficit of 10% of GDP and its public debt mounts to 80% of this figure. It is no doubt that the poor-law would make the budget deficit crisis even more but by how much?

Much of it depends upon the wages set. If wages over market prices were set, it would be extremely expensive to fund and would create excess supply of workers. By paying a higher wage, more people will find private employment not to be an option and will try to find employment through the work schemes.

However, it is surprising to note that the budget deficit actually fell after the Maharashtra scheme was adopted as jobs were rationed. But it only met 43% of the demand for work and therefore the scheme was no longer offering guaranteed employment.

There are three main issues the government faces with providing guaranteed employment. It will try to achieve three goals which would be to guarantee employment, at the minimum wage without forcing the budget deficit further into the red. It can only achieve two of the three as they would offer above market wages, which would not guarantee employment if they were trying to prevent problems financially.

With problems with the budget deficit, the aim to fight poverty and provide employment may face problems. The main question to ask is whether the UPA is willing to risk further fiscal problems in order to relieve poverty in India?