Schemes To Systems | The Future of Social Protection: India and the World

Your daily office commute is delayed due to strikes against ride-sharing companies. Your nephew just joined his second start-up. Your daughter lands a job as a freelance journalist. Your street vendor who sells flowers down the street has been absent due to an illness. Your maid asks you to help contribute to a web-based pension product, she has a tough time applying for government social pension programs as she cannot prove that she has been living in Delhi for three continuous years. 

India has made tremendous strides in poverty reduction in the first decade of the 21st century. However, economic growth has failed to generate enough stable and good jobs for its burgeoning working-age population. Employment has grown rapidly in construction and retail, gains in manufacturing jobs has been slow. And even within manufacturing, and in the organized sector more broadly, employment contracts have been shifting towards greater informality, as production is out-sourced and new hires are taken on as contract workers without job security or social security. In 2012, over 90 per cent of Indian workers were informal. As per the most recently available data, the share of contract labor in organized manufacturing reached 34 per cent in 2011, up from 14 per cent in 1996.

Most social protection systems in rich countries were developed at a time of “jobs for life,” with social insurance based on mandatory contributions and payroll taxes on formal wage employment. But around the globe, this traditional, payroll-based insurance system is increasingly challenged by working arrangements outside standard employment contracts. In the U.S., pension plans are becoming a thing of the past.  In India, Indonesia, Pakistan, Bangladesh and Nigeria — which combined account for about a third of the world’s population — coverage of social insurance is single digit or almost so, with virtually no change detected over the past decades.

 As we examine the changing nature of work in our 2019 World Development Report, we are taking a look at how we can better protect people and workers in the new economy.  There are three salient findings which must guide the future of social protection in India and the globe.

1. Informality, which currently engulfs around 80% of labor markets in developing countries, is a premier bottleneck. Most workers — especially the poor — are engaged in informal sector activities with no or little access to social protection. Given the endemic nature of challenge and slow progress against it, most people would be better-off with a social protection system that does not depend on their work situation. India can teach the globe many lessons in creating such an architecture – as several new social insurance programs such as Atal Pension Yojana and the new health insurance scheme delink benefits from pay-roll contributions and reliance on a steady employer.
2. Social assistance programs which transfer benefits to protect the poorest from risk and ensure equity in societies, could be adapted and enhanced to include larger swaths of informal sector workers. In developed countries, there are a range of options starting with a means-tested Guaranteed Minimum Income (GMI) programs and ending with a Universal Basic Income. An intermediate option could be a Negative Income Tax that has relatively high threshold and gradual withdrawal of benefits, or a smaller GMI supplemented with other programs, such as universal child allowances and social pensions. However, as many discussions highlight, the feasibility of implementing such mechanisms at scale in India appear limited at present. This is not due to fiscal constraints alone, but state capacity concerns – neither of which are trivial. Prior to testing universal transfers, administrative building blocks for cash delivery and targeting need to be in place which minimize chances of exclusion, in addition to a clear social protection strategy on how different pre-existing schemes can be consolidated. The solution to a fragmented four-hundred scheme system cannot be creating a new income transfer scheme without consolidation of other programs.
3. The notion of ‘progressive universalism’ can help guide such a strategy in ways that benefit the poor and vulnerable first. India must define a core basket of social security benefits relying on a mix of its current programs. Once guaranteed solid basic protections are in place, people could keep upgrading their security with various progressively-subsidized schemes – with contributory social insurance where conducive conditions exist, but also an array of voluntary options where the state and markets can offer them.

Financing more investment in social protection is a formidable challenge globally. But several options leveraging carbon pricing, tech-enabled tax system reform and energy subsidy reform exist. For example, Vietnam could increase tax revenues by 11 per cent by moving to a uniform VAT rate of ten per cent. Excise taxes, for example on tobacco, are another source of potential revenue. It is estimated that nationally-efficient carbon pricing policies could raise substantial amounts of revenue—above six per cent of GDP in China, Russia, Iran, and Saudi Arabia. These taxes could be paired with the elimination of energy subsidies, which amount to $333 billion globally. Other forms of recurrent taxation may include immovable property taxes as well as a fair corporate tax system, which is currently plagued by loopholes in the international tax architecture. Just as technology improves delivery systems for social protection programs, it can also facilitate tax collection by increasing the number of registered tax payers and social security contributions. Reforms such as the Goods and Services tax can go a long way in bolstering state revenues to finance schemes and systems for the vulnerable.

The article is authored by Michal Rutkowski, Global Director for Social Protection, World Bank. An abridged version of this article was originally published in the Hindustan Times on February 18^th, 2019