Competitiveness and Resilience through Social Security: Toward a More Inclusive System

The COVID-19 pandemic has underscored the importance of social security for protecting workers against economic shocks, and for smoothing consumption during downturns. As forces such as technological advancement and climate change continue to upend lives and livelihoods, social security is critical for building resilience. In the long run, it is both a contributor to, and evidence of, rising living standards and a growing consumer base. At the same time social security is fundamental in enabling a productive and resilient workforce to support the countryÕs aspirations to export more and to invite greater investment.

As the Indian government negotiates new trade and investment agreements, these efforts must be accompanied by a robust social security system. Inadequate social security, both in scope and scale of benefits, is a structural challenge that keeps the country’s labour force trapped in low-productivity, low wage, informal work; its shortcomings serving as a barrier to realising the economy’s potential with implications for trade and investment partners. In recent years, major forces ranging from technology to the pandemic are restructuring India’s economy and its labour market. India has seen slowing growth, and an ailing labour market that is reflected in its declining labour force participation; stubbornly high informal employment; and an uptick in unemployment. All of this is compounded by a demographic bulge that underscores the need for large-scale job creation. These adverse trends deepen inequality and threaten the sustainability of economic growth (Berg and Ostry, 2011). At its core, social security has three broad functions:

First, to provide access to healthcare. Evidence suggests that health-related expenses can drive millions into poverty (Selvaraj, Farooqui, and Karan, 2017; Berman, Ahuja, Bhandari, 2010).

Second, to serve as a safety net in the face of contingencies such as loss of income, disability, old age, and other such events. These tenets are defined by the International Labour Organization’s Social Security Convention, 1952 (No. 102) and the Social Protection Floors Recommendation, 2020 (No. 202) (Appendix 2). Access to these benefits can be linked to employment or be between the government and the worker. In this category, there is significant focus on life insurance and pension plans with states providing a range of different options.

The third function goes beyond standard notions of social security to include job and income support through schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), which to date is possible in rural but not yet in urban areas Ð developments around instituting an Urban Employment Guarantee notwithstanding. MGNREGS is also an effective mechanism to help the rural economy build resilience towards low-to-medium intensity climate risks. (Kaur, et al., 2019).

The pressing question is whether the existing architecture for social security can be defragmented into a simple and inclusive system that serves all three of these functions.

Yet IndiaÕs heterogenous labour market, in the absence of universal coverage, makes it hard to extend coverage. At the broadest level, India has a ‘dual economy’ in which workers are categorized into informal or formal employment. For workers in the formal sector, the main mechanisms for social security are through the Employees’ Provident Fund Organization (EPFO) and Employee State Insurance Corporation (ESIC). The new Code on Social Security 2020 and draft rules clearly express the governmentÕs intent to extend social security access to unorganized workers. Currently though, its provision is channelled through a complex set of ‘schemes’ that not only leave many without coverage, but which the government in office has the liberty to alter or withdraw as it sees fit. This is further complicated by the fact that much of the fragmentation happens at the state level.

This brief provides an overview of the current state of India’s social security system and raises questions about how to best streamline and restructure the current fragmented approach to iteratively move toward universal provision that extends coverage to more people.

Preparation of this work is supported by the British High Commission, New Delhi, under the UK-India Economic Policy Program.