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FEATURE STORY March 5, 2019

Schemes To Systems | Rebalancing Social Protection in India


A family from Bhagurdi village in Maharashtra, India

Michael Foley/ World Bank Group

A steady, safe, well-paid job is the best protection against economic hardship.  But when this ideal situation is not possible, social protection programs help people become more resilient to the risks they face. Of late, there is growing enthusiasm for basic income support as a core tool for social protection in India. But income transfers cannot prepare or insure people against all shocks. Typically, a comprehensive social protection system requires three types of instruments to work together:

  1. Promotional instruments invest in the ability of families to survive shocks on their own –by enhancing productivity, access to job opportunities and incomes through human capital infrastructure, wage legislation, labor policies, skills training and livelihood interventions.
  2. Preventive instruments aim to reduce the impacts of shocks before they occur by enabling households to use their savings from good times to tackle losses in tough times. This is mainly done through social insurance programs.
  3. Protective instruments mitigate the impacts of shocks after they have occurred through tax-financed redistribution from the non-poor to the poor. These programs would classically be called anti-poverty measures as they target social assistance or safety net programs to the poor or destitute, whether in kind or cash.

When social protection schemes were created in India after independence, most of the country was reeling from a period of famine, de-industrialization and multiple deprivations. Half the population was chronically poor, the country had an aggregate food deficit, financial and banking networks were under-developed, growth rates were weak and technology available for program administration was rudimentary. Therefore, India’s policy makers focused almost exclusively on anti-poverty, protective instruments. But that India no longer exists, and the country’s social protection system needs to evolve and catch up with the needs of its new demography and risk profile.

Three stylized facts are important to guide this evolution:  

  • Despite the dramatic fall in households below the poverty line to 22 per cent, the challenge of chronic poverty remains. India shelters pockets of deep poverty and these households are geographically clustered. A significant 15% of households that were poor in 2005 remained poor in 2012.
  • Inequality across locations and demographic groups has increased. In 2012, the latest year for which estimates are available, the poverty rate of six of poorest states in the country was twice that of other states. Seven low income states - Chhattisgarh, MP, UP, Odisha, Jharkhand, Rajasthan and Bihar - account for 45 per cent of India’s population but nearly 62 per cent of its poor. Within states, poverty and vulnerability remain highest amongst Adivasis. Moreover, women are largely missing from the workforce and face risks to their mobility and well-being.
  • The majority of India is no longer poor. Instead, half of India is vulnerable. These are households that have recently escaped poverty with consumption levels that are precariously close to the poverty line and remain vulnerable to the risk of slipping back. Programs must ensure that those who’ve escaped poverty are able to sustain improvements.  

"It’s critical that programs help those vulnerable to poverty to anticipate and manage risks and shocks better through portable tools prevent them from falling back into poverty– health insurance, social insurance (in case of death, accident and other calamities) and pensions."

For example, in 2016, a traditional safety net such as the Public Distribution System (PDS) expended sixteen billion dollars, the life and accident insurance programs spent less than sixteen million dollars together. While there has been a marked expansion in social insurance programs and coverage, revised expenditure estimates for 2018-2019 show that programs such as the PDS still constitute 38% of social protection spending in the country, compared to less than 1% of the social protection budget being spent on health insurance.

It’s critical that programs help those vulnerable to poverty to anticipate and manage risks and shocks better, not only attempt to provide aid to relieve deprivations experienced by the poor. Portability is key to ensure migrants receive support while they try to build new lives in new places, as state governments often use residency criteria to target benefits.

Coverage of social insurance programs remains low in India, and wealthy households can afford private options. India Human Development Survey 2012 data shows that 27 per cent of households report members using/benefitting from private insurance. Unsurprisingly, the bottom 20 per cent report very low uptake of private options for market-based insurance. Most Indian households – poor and non-poor - rely on personal savings to deal with health, accidents or climate shocks.  Micro surveys and administrative data also highlight major gaps in pension and health insurance coverage. 

Recent policies have taken steps in the right direction. The boost in crop insurance, new pension plans for the elderly, new contributory pension schemes for those who have the wherewithal to save, and larger coverage of health insurance programs will help India re-balance its social protection architecture to match the needs of the rising numbers of its vulnerable people.  

Given the huge diversity in the economic profile of India’s states, a variety of approaches will be called for. For instance, the needs of the rising middle-class with access to private insurance markets in Delhi and Maharashtra will differ markedly from the needs of poorer states such as Uttar Pradesh and Bihar. Delhi should be enabled to spend its centrally allocated social protection resources differently from Uttar Pradesh. In states where many poor and vulnerable households are still not able to save enough to insure themselves against crises or times of high prices, social assistance will remain a core intervention.  In low income states, traditional anti-poverty programs such as PDS or MGNREGS, if implemented well, can serve twin goals of protection and prevention by ensuring India’s vulnerable don’t become poor and that the poor live with dignity during times of drought or food price inflation. Effective safety nets can dramatically reduce the number of poor and the likelihood that poverty will be transmitted from one generation to the next.  Strengthening their delivery systems is key, while allowing state governments to choose the optimal mix of preventive and protective programs to suit their state’s needs within an umbrella social protection budget.

If insurance coverage is adequate and expands, many families would not need to rely on safety net transfers in the face of old age or health crises which would otherwise push households into long term poverty and debt traps. Thus, an increased emphasis on interventions that help anticipate risks should be expected, particularly in medium- and high-growth states.

In 2019, India is no longer a largely chronically poor country but a more unequal and vulnerable country with pockets of deep poverty. India’s future shared prosperity will depend to a large extent on how its social protection system evolves and catches up with its diversity and demography. 

The article has been authored by Shrayana Bhattacharya, Senior Social Protection Specialist, World Bank, John Blomquist, Lead Economist, World Bank and Rinku Murgai, Lead Economist, World Bank. An abridged version of this article was originally published in the Indian Express on March 4th, 2019.