11/24/2010 Financial Express : Column : Build a saf…

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Column : Build a safety net, not a hammock

Manish Sabharwal
Posted online: 2010-11-17 22:46:15+05:30

Demands for the 100-day job under NREGS to pay minimum wages have revived with the National Advisory Council’s
(NAC) letter to the Prime Minister supporting earlier letters from the chief ministers of Andhra Pradesh and Rajasthan.
Accepting this demand would be a mistake because it would not only distort labour markets but also blunt the march to
higher productivity of our people and economy. Wages must reflect productivity and NREGS payments are not wages but
cash transfers to the poor because they have an opening balance that is difficult to escape. If the objective of NREGS is
sustaining poverty reduction, a more effective tweak to the scheme will be converting it into a 100-day apprenticeship
programme that would create a corridor for skills, higher productivity and higher wages.

Economists will debate for years whether NREGS has been one of the causes of the dangerous and painful food inflation
over the last few years.

In my view, the only desirable—and largely unintended—consequence of NREGS has been to catalyse a long overdue
increase in the machinery and capital investments in agriculture, which are raising productivity. When farmers talk about
the shortage of agricultural labour they mean the shortage of labour at the price they had got used to paying.

The NREGS rate does to national agricultural markets what the LIBOR rate does in global dollar borrowing markets; it
sets a floor. But just as every loan is not made at LIBOR rates but is priced off it, NREGS payments must not equal
minimum wages. More than 19 states have now increased minimum wages to levels over NREGS and this is not a
problem but an important signal of the returns to skills and employability. Equating NREGS payments—I refuse to call
them wages—with minimum wages will only trigger another round of minimum wages increases that will not reflect
productivity. Unlike China where wages are horribly sticky and mostly administered, India’s wages are quite efficient at
pricing skills. Efficient pricing of skills is key to accelerating the privatisation of skills by influencing personal career
choices and allowing the emergence of third party financing for personal skill repair.

NAC is upset that the NREGS violates the Minimum Wages Act. But everybody knows that NREGS violates 37 labour
laws, including the Provident Fund Act, ESI Act, Industrial Disputes Act and Contract Labour Act. I have never received a
reply to my repeated letters to the government asking for the rationale of the temporary job apartheid under which a non-
fiscal, minimum wage and social security paying 100-day job offered by the private sector is viewed as a disease to be
eradicated, while the inefficient, non-market, non-real job based NREGS is considered the labour market innovation
equivalent of cell phones.

The Central Employees Guarantee council working group on wages, headed by Jean Drèze, said that state wages
should be paid indexed to the CPI. Debates about minimum wage periodically flare up but we can learn from other
countries. The US is a good case study: consider the May 2007 law that raised the minimum wage in three stages to
$7.25 an hour from $5.15. Rarely has a law hurt the more vulnerable people more quickly. A higher minimum wage has
the biggest impact on those with the least experience or the fewest skills. Usually that means those looking for entry level
jobs, especially teenagers. To raise the cost of unskilled labour precisely when they need a portal to employment is an
act of almost wilful economic stupidity. In many cases the wages have since become zero.

But NREGS is here to stay and the good is not the enemy of the great. So we must tweak the current structure of NREGS
payments to be apprenticeship stipends for 100 days of on-the-job training. These apprenticeships could be
complemented or combined with 100 days of classroom or satellite training to produce skilled manpower that earns
wages which reflect productivity. If the NAC really wants to innovate, it must propose a solution that amends the
Apprentice Act of 1961 and transfers some NREGS money to the starving but effective modular employment skills
programme of the ministry of labour. A 100-day apprenticeship under NREGS that combined learning-while-earning and
learning-by-doing would surely move the needle on the horrible skill deficit that keeps our people out of jobs or in working
poverty. The current campaign to equate minimum wages with NREGS payments almost legislates that the bridge to
productivity becomes the destination. In the name of our poor who need a chance and not charity, it must be resisted.

—The author is chairman, Teamlease Services

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