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Rethinking Social Protection for the Informal Sector: Analytical Essay

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Ever since India’s “tryst with destiny” in 1947, it has been the aim of Indian policymakers to promote equitable economic development in the country. This strategy of ‘inclusive growth’ aims to balance economic growth with the reduction in the acceleration of inequality and poverty. Yet, many in India grapple with deprivation and vulnerabilities.

According to International Labour Organisation’s (ILO) World Social Protection Report, 2017- 19, India spends only 2.7% of its Gross Domestic Product (GDP) on total social protection expenditure (including health), thus becoming a global outlier on social protection. Moreover, about 22 per cent of India’s population lives below the poverty line. The so-called ‘trickledown’ economics has demonstrably failed to empower the poor.

The economic structure in India can be characterised by its labour force which is not only heterogeneous but is also marked by informality and self-employment. An average of 4.5 million people join India’s labour force each year, but a 2017 ILO survey found that 92 per cent of the workforce – now totalling 426.1 million people – are in the unorganised or informal sector. This predominance of informality suggests the extremely low levels of social protection and social agency for such workers. Most protective and preventive social security legislations serve only the organised economy whereas social security programmes dedicated to the unorganised sector are predominantly promotive in nature.

Therefore, the concerns of the policymakers should be on the rise on account of, firstly, the growth of the unorganised sector at an alarming rate, with no social security for the workers to rely upon during contingencies and old age. Secondly, there is an acknowledgement of the inadequacy of the existing legal and protective frameworks by the development planners and scholars. Finally, with the escalating fiscal deficit scenario, a rethinking of the existing social protection measures becomes even more fundamental in order to devise a future agenda in this regard. With the advent of globalisation, the world of labour has been affected in the most adverse ways, therefore warranting greater attention and protection.

The following paper begins with an attempt to trace the concept of social protection. It will also throw some light on some of the social protection programmes along with their assessment in a brief yet comprehensive manner. India is also exploring the establishment of a nationally-determined social protection floor, hence this concept will be dealt with in detail. The fiscal, design-based, and implementation roadblocks shall be discussed in order to endeavour to develop a roadmap for an effective social protection system and policy which can be in consonance with the overall macroeconomic policy of India.


The World Social Protection Report, 2017- 19 says that “social protection or social security, is a human right and is defined as the set of policies and programmes designed to reduce and prevent poverty and vulnerability throughout the life cycle. Social protection includes benefits for children and families, maternity, unemployment, employment injury, sickness, old age, disability, survivors, as well as health protection.” It also adds that “social protection systems address all these policy areas by a mix of contributory schemes (social insurance) and non-contributory tax-financed benefits, including social assistance.”

The growing trend towards informalisation as well its expansion in the labour markets has led to the emergence of a renewed concern for social protection in the recent decades in both the developing as well as the developed world. India has an extensive ambit of social protection programmes, but the overall public expenditure on social protection (excluding public healthcare) is only 1.5% (approximately) of the GDP, lower than many middle-income countries. The Economic Survey of 2018 revealed that 87% of firms are purely informal, outside both the tax and social security nets, thus estimating the size of the informal sector and reflecting the challenge of decent work in India.

The framework

According to a Senior Social Protection Economist and Lead Economists from the World Bank (as mentioned in their editorial piece in the newspaper The Indian Express), typically, a comprehensive social protection system requires three types of instruments to work together:

  • First, 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, labour policies, skills training and livelihood interventions.
  • Second, 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.
  • Third, 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.

In India, the term encompasses social insurance, social assistance, social protection, social safety net, micro-insurance or insurance for the poor and other measures involved. India has mainly relied more upon promotional measures (primarily social assistance) and protective measures are mainly available to formal workers (only 6.5% working in the formal sector, according to ILO). The remaining 81% of the workforce i.e. the informal workers are devoid of any such coverage.

The two most important promotional programmes at present are the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and the Public Distribution Scheme (PDS). The former is a Labour Market Programme whereas the latter is a Social Assistance programme. It becomes essential to revisit these policy measures, especially in the light of the rising informality and the precariat nature of the workforce and the poor in India. MGNREGA will be seen by keeping in the background the declining productivity of the rural agrarian community.


The Mahatma Gandhi National Rural Employment Guarantee Act was passed by the Indian parliament in 2005 to enhance the “livelihood security of households in rural areas of the country” while creating “durable assets.” It requires the government to provide at least 100 days of employment per financial year to all rural households with adult members willing to do unskilled manual labour on community and local infrastructure development projects.

However, innumerable studies stress upon the need of an intense revaluation of the system in which this programme functions. The programme struggles with concerns such as leakages and misappropriations in the scheme including, non-availability of muster rolls at worksites, fake entries in muster rolls, use of contractors and machinery, payments to fictitious (ghost) workers, infrequent social audits, which, along with ‘proactive disclosure’ was inbuilt in the scheme as an accountability mechanism, and ineffective grievance redressal (Ministry of Rural Development 2012). Social audits reveal a rise in “Benami” wage payments. Source: Government of India Economic Survey 2016- 17

An overview of the various states done by PRS Legislative Research in 2014 reveals that, on average, the number of days of work provided was only 46.2, well below the 100 days of work stipulated. While states like Mizoram (87.8) and Tripura (86.9) performed relatively well in this regard, there were five states—Arunachal Pradesh (28.8), Assam (25.4), Goa (13.5), Punjab (27.3) and Uttar Pradesh (28.5)—that actually provided less than 30 days of employment.

MNREGA has also led to severe distortions in the labour market. According to Bhagwati and Panagariya, the programme distorts the labour market in three ways—diversion of the labour force away from productive private-sector employment; increasing the market wage, thus posing the risk of “perverse choice of input mix in agriculture”; and, a possible adverse impact on work culture. This rise in market wages has a tendency to further perpetuate the agrarian distress that is sweeping rural India.

Therefore, the government should focus on simplification and strengthening of procedures for the effective implementation of MGNREGA. Lessons can be learnt from better governed States, from creating improved financial management systems to using technology-enabled banking solutions like smart cards, social audits and building grievance redressal systems. Corruption should be dealt harshly, but cutting funds to development programmes is definitely not a plausible solution. Corruption can be fought through the use of IT and community-based accountability mechanisms like social audits.

It should have an intensified focus on marginalised communities in the most backward blocks and on skill development of households that have completed 100 days (about 8% of the total). In addition, the act can be linked with the Socio-Economic Caste Census to ensure better targeting. It is also time to review the basis for determining wage rates. But most of all, what the MGNREGA requires is consistency in political support.


The Public Distribution System (PDS) is the largest safety net programme in India, which was introduced with the objective of protecting both the primary producers and consumers from fluctuations in agricultural prices. It operates by providing and ensuring a floor price for the producers of certain food grains and agricultural commodities and a price subsidy to consumers for essential commodities (most important being rice, wheat and kerosene). This programme distributes subsidized food items to the poor through fair-price shops. PDS receives the maximum budgetary allocation of all SP programmes in India, costing ~1% of GDP.

The administration is decidedly cumbersome and leakage-prone: The Central Government procures food grains and transports them to each state, while State Governments are responsible for identifying eligible households and delivering the subsidised items to designated shops, from where beneficiaries can buy entitled amounts at heavily subsidized prices.

PDS transformed from a general and universal scheme to a geographically targeted supplemental subsidy scheme, and since 1997 to a scheme targeting food subsidy (in proportion to state poverty levels estimated by the Planning Commission) to BPL households, called the Targeted Public Distribution System (TPDS). The TPDS has a 2-tiered pricing structure for Below Poverty line (BPL) and Above Poverty Line (APL) households.

The two main problems associated with the TPDS are related to delivery and targeting errors. These add to the cost of delivering subsidy to a poor household. India’s largest SP programme suffers from mammoth issues, such as high diversion ratios (proportion of food grains fraudulently sold in the open market), faulty targeting (high inclusion and exclusion errors), poor storage conditions and wastage of grains in transit. Financially, PDS is massively inefficient: The Government spends Rs. 3.65 to deliver Re. 1 worth of food. Recently, as part of the discussion on cash transfers replacing subsidies, the Government attempted to estimate inefficiencies in PDS. It was found that only 28% of PDS resources reach the intended beneficiaries – 36% are lost due to leakage (pilferage, wastage) and another 36% get diverted to non-beneficiaries (due to corruption, targeting errors). Due to this, ~40% of the intended beneficiaries do not receive their entitlements. Source: Government of India Economic Survey 2016- 17

Juxtaposing the data on PDS use from the NSS with the decline in the proportion of underweight children from the National Family Health Survey and the Annual Health Survey conducted by the Office of the Registrar General of India and the District Level Health Survey conducted by the International Institute of Population Sciences, it is difficult to find any correlation between the two. Therefore, there is a clear disjunction between increase in the use of PDS and a decline in malnutrition.

Considering the ubiquitous role that TPDS is playing in becoming a source of subsidised cereals to a rising proportion of the Indian population, the strengthening and streamlining of TPDS should be a continuous process. Procedural, as well as policy reforms, are needed to deal with the problems surrounding this system. Technology-based reforms are suggested i.e. an end-to-end computerisation of TPDS operations which would facilitate digitization of ration cards/beneficiary and other databases, computerization of supply-chain management, setting up of transparency portals and grievance redressal mechanisms.

It is difficult to let go of the PDS, at least in the short run. The political sensitivities, complexity in dismantling the massive system built over time, and inadequate infrastructure to transfer money to beneficiaries may act as barriers. Therefore, a revamping of the PDS is required, which should definitely be backed by strong political will and good governance. One must look up to the stellar performance by Odisha as a success story of governance in the domain of the PDS. With its state-of-the-art e- PDS from 2004 onwards, it embedded the values of transparency and accountability in its governance. The outlets were largely brought under the ambit of community, presently managed by gram panchayats, self-help groups (SHGs), cooperatives and non-governmental organisations, which ensured participatory management and transparency in administration. The entire distribution system was computerised and vans were mobilised to reach distant places that were otherwise disconnected from the mainstream distribution network. The movement of food grains from the warehouses to fair prices shops was monitored and tracked with GPS systems. The weighing scales were digitised, transport agencies were separated from distribution agencies and fixed distribution schedules were introduced. In fact, the overall system was strengthened with provisions for a grievance redressal mechanism. NSS statistics showed an increase in coverage of beneficiaries, contribution of PDS grains in calorie intake, consumption among the weaker sections as compared to privileged social groups.

The functioning can be improved further by strengthening the identification mechanism and widening the distribution network to remote corners to enhance access. Continued research and improvements in logistics throughout the distribution chain is imperative.

A social protection floor for India

Social Protection Floor or SPF is a joint United Nations campaign which is anchored by the ILO. The origin of the concept is derived from the Social Protection Initiative launched by the United Nations System Chief Executives Board for Coordination in April 2009. As described by UN Secretary-General Ban Ki-moon, the aim of the Initiative is to help governments and partners establish minimum protection floors in every country which guarantee that no one lives below a certain income level and everyone has access to essential public services such as water and sanitation, health and education.

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According to the UN guidelines, an SPF must comprise at least four social security guarantees under its framework-

  1. Access to a nationally defined set of goods and services, constituting essential health care, including maternity care, that meets the criteria of availability, accessibility, acceptability and quality;
  2. Basic income security for children, at least at a nationally defined minimum level, providing access to nutrition, education, care and any other necessary goods and services;
  3. Basic income security, at least at a nationally defined minimum level, for persons in active age who are unable to earn sufficient income, in particular in cases of sickness, unemployment, maternity and disability; and
  4. Basic income security, at least at a nationally defined minimum level, for older persons.

Countries have the flexibility of designing an SPF depending upon their level of development and their specific history and context. According to ILO Recommendation 202, an SPF must create clear-cut entitlements and should be backed by legislation.

The SPF Advisory Group Report (ILO 2011a) states that the SPF is “part of a two-dimensional strategy for the extension of social security, comprising of a basic set of social guarantees for all (horizontal dimension), and the gradual implementation of higher standards (vertical dimension)” Both are to be pursued simultaneously, in a framework of “progressive realization, compatible with a country’s fiscal an administrative capacity and in the framework of an integrated social protection system” (UNICEF 2012). Therefore, building a social protection floor is an incremental, rights-based process that requires national adaptation with respect to how and through which entitlements transfers in cash and in-kind are organized.

In moving towards an SPF, three types of inter-related challenges come to the picture. These include firstly, the fiscal challenge, secondly, the challenge of an appropriate design for the dimensions of the proposed SPF, and finally the challenge of effective implementation which also involves improved accountability of all those implementers and pro-active measures to reach the most vulnerable segments of the population. The study aims to address these challenges whilst coming to the SPF framework in the context of India.

In an attempt to come towards a universal definition of SPF, the UN (ILO & WHO) stated that a social protection floor could consist of two main elements that help to realize respective human rights:

  • Essential services: geographical and financial access to essential services (such as water and sanitation, adequate nutrition, health and education).
  • Social Transfers: a basic set of essential social transfers, in cash and in-kind, paid to the poor and vulnerable to provide a minimum income security and access to essential health care.

Keeping the above in mind, one cannot undermine the significant two-way linkage between social protection (floor) and labour conditions, and hence labour protection- which forms one of the important strategic objectives of an SPF.

Cost and feasibility of an spf mechanism

A number of studies establish that the financing of social protection measures can be kept at a fairly modest percentage of national income (ILO & WHO, 2009). An ILO (2008b) Costing Study for a “Basic Social Security Floor” for ten countries (including India) on universal old-age protection, child benefits, essential health care, and an unemployment package (on the lines of the MGNREGA in India) covering 10 per cent of the labour force concluded that the initial gross annual cost of the overall basic social transfer package (excluding access to basic health care that to some extent is financed already) would be in the range of 2.3 to 5.5 per cent of GDP in 2010. Individual elements appear even more affordable. The annual cost of providing universal basic old age and disability pensions, for example, is estimated in 2010 at between 0.6 and 1.5 per cent of GDP in the countries considered (ILO, 2008b).

The level of social provisions is, however, driven more by a country’s political and policy environment than its level of development. The cost of a well-designed social protection floor is small compared to the tax revenues often foregone by not effectively collecting revenue from the wealthy and by not tackling inefficiencies that exist in many expenditure programmes.

Effective country-specific programmes, which can gradually expand, are not only affordable but can, in the long run, pay for themselves by enhancing the productivity of the labour force, the resilience of society and the stability of the political process. The ILO estimates that a set of minimum transfers is not costly in per capita terms, although it is likely to require support from external sources in the poorest settings.

Therefore, in the long run, the mobilization of resources in India must stem from raising the tax/ GDP ratio from its present low levels. Concessions which have a weak economic rationale must be cut down upon.

Designing of the SPF

In the past few years, there has been an uproar of a new generation of policies and programmes which endeavour to provide the essential ingredients of a comprehensive SPF for India. There is a movement toward a rights- based approach to provide universal entitlements of health, food security, housing, education, basic income security, social security and employment, among others. Therefore, the implementation of all the current undergoing schemes must keep in consideration the four tenets of an ideal SPF mechanism, as mentioned before. A social protection strategy to address vulnerabilities addressed by each segment of the vulnerable population must be carefully designed.

“Within a rights-based framework for SPF, there has to be a dovetailing of principles of universality with the extent and depth of vulnerability, so that the use of scarce resources can be prioritized.”

The targeting of social protection programmes to “Below Poverty Line” households remains a major issue in India. The identification criteria, as well as their application on the ground, are extremely faulty, leading to large and costly exclusion errors (since benefits are not graduated but loaded onto BPL households).

Due to the concurrent nature of social protection programmes, the passage of programmes by the Centre reduces the flexibility that States have in designing their own schemes (since Central schemes also pre-empt the State’s fiscal space) as well as States’ ability in implementing the Central programmes with desired flexibility. The results can be sub-optimal as the design of the scheme may not be appropriate for the state and states may neither have the wherewithal to develop their own schemes nor the incentive to implement the Central schemes well. A similar logic holds for local bodies, especially large urban bodies which have a larger tax base and also requisite capacity to address SP issues. On the other hand, the Central government may have strong politico-economic compulsions to retain control of Central Schemes and to monitor them. These reasons become stronger in a rights-based framework since the Central government constitutionally shares the obligations arising out of the legislation (or where the implementation responsibility is on lower levels of government).

Therefore, a rights-based framework for implementation of SP programmes provides the ground for greater decentralization.

One of the general principles of the design of SP systems is to consider whether, and how, these systems could graduate from non-contributory to contributory schemes, which could add to their sustainability over the long run. Recently, the Pension Parishad, an umbrella organization of grassroots organizations has raised the demand for a universal non-contributory contribution, mainly on grounds of its administrative feasibility. The NCEUS has recommended non-contributory schemes for the very poor but a contributory scheme for the very poor.

The design of an effective system must also be able to overcome systematic gender and caste-based barriers. It has been argued that SPF programmes which address female vulnerabilities at early stages of the life cycle are especially successful, but such protection should be extended to the causes of vulnerability and to all stages of the life cycle of women.

Implementation challenges

Firstly, SP programmes rarely build on the cost and incentive structure for implementation at various levels. There is rarely any consideration of political economy issues, local power structures, and conflicts of interest. Large programmes function through overloaded administrative structures both at the top (where monitoring and design issues are concentrated) and the bottom (where implementation issues are concentrated). Therefore, given the size and complexity of the programmes, there has to be clear advanced thinking of the institutional architecture of the SPF programmes and the administrative requirements. There is also the need for a proper appreciation of communication and IT technologies.

Secondly, measures need to be taken to continually strengthen internal and external accountability where the role of effective decentralization becomes important.

While creating legal entitlements, as proposed here creates an important condition for better accountability, this is not at all automatic due to pervasive asymmetries and the cost and tardiness of legal solutions.

Formidable formalities and documentation work disentitles the most vulnerable empowers the local bureaucracy or local middle-men and increases corruption at the cost of these groups. The poorest and the most vulnerable sections of any population, whether rural or urban, who have the smallest social capital as well as physical and financial resources, are excluded from participating in the SP programmes.

Therefore, there is a need for proper design and proactive implementation with outside support.


The creation of a Social Protection Floor can have dramatic consequences for the lives of the poor, macroeconomic stability, growth and development. It can lead to socially inclusive and sustainable growth. The SPF will lead to the progressive realization of human rights. The Social Protection Floor should be seen in conjunction with promotional Social protection Programmes, and an appropriate social and economic policy framework which focuses on the expansion of employment opportunities and decent work.

The UN recommends that the SPF build on existing initiatives, therefore a revamp of the current social protection programmes is needed. Instituting such an SPF poses challenges but it is within the capacity of the Indian state at its present level of development to meet these challenges. A Social Protection Floor must not only cohere with its own constituent elements, it must also be consistent with the larger social protection strategy, and the latter and macro-economic policy must cohere with each other in order to maintain a rapid tempo of sustainable, equitable and socially inclusive growth.

The main challenge before the economy is how to promote a pattern of growth that can sustain a high growth rate of good quality (formal) employment in manufacturing and other productive sectors, promote social inclusion, reduce inequalities, and improve human capabilities of those sections of the population who have been largely excluded from the benefits of the current process of growth. This will require sustained investment in social protection.

The creation of a Social Protection Floor in the manner that is being visualized through an extension of entitlements and the rights-based approach will lead to a definite strengthening of these positive outcomes and create the long-term basis for inclusive growth in India.

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