By Santosh Mehrotra
The World Bank reported that 56 million Indians fell below the international (extreme) poverty line of $2.15 per person per day in 2020, the first year of Covid. It also highlights the need to use fiscal policy to address the crisis of poverty. One of the policy imperatives highlighted by the Covid crisis, and this rise in the number of poor, is that 91% of India’s workers are informal and have no social security. Only the remaining 9%, working for governments, PSUs, and formal private firms, have social security.
This situation is further complicated by the fact that 96.7% of India’s 64 million non-farm enterprises are in the unorganised sector (employing less than 10 workers), as per 2015-16 NSS data. (This shows how small is the total number of organised/formal sector firms: 3.34% only in 2015-16). As much as 84% of unorganised units consist of Own-Account Workers. Providing social security to such non-farm workers becomes difficult since no identifiable employer-employee relationship is involved in such work. Moreover, two-thirds of all non-farm units are not registered anywhere—making it challenging to extend services to them (including social insurance).
If the state wishes to provide social security to all informal workers, it has to adopt a non-standard, innovative approach, which goes beyond what the Social Security Code 2020 envisages. This piece is devoted to how that can be done.
There is high differentiation among different groups of informal workers. In rural areas, there are landless farm labourers, owner-cultivators, and small/marginal tenant cultivators. In the non-farm sector, there are self-employed (including own account workers), as well as regular and casual wage workers.
For a social security system among the informal, there is a case for three categories of beneficiaries. The first category of beneficiaries should be part of a non-contributory scheme, intended for the poorest, financed from general tax revenues (as is found in many Asian countries, and also partly exists in India too, e.g., Atal Pension, PM Shramjivi Maandhan). A second category would be for the non-poor beneficiaries. This should involve partial contribution by the non-poor regular (but informal) wage workers as well as the non-poor self-employed, complemented by government subsidies towards their contribution (as found in many Asian countries), while employers make the full contribution. Finally, the third category would be for the organised sector workers, full employer, and employee contribution under the EPFO system. To eliminate fragmentation, the first two should be part of the same system since they are the unorganised sector, informal workers. The third category will consist of those who are informal workers in organised sector enterprises. So, India could have two funds only, one managed by the EPFO, and the other by National Social Security Board for Unorganized Workers (noted in the SS Code 2020).Within the Agricultural sector, different groups have varying paying capacities. Hence, there should be two types of schemes for them: one for landless wage labourers and small/marginal farmers, which would be non-contributory, and another for medium to large farmers (determined by size of land-ownership) that could be contributory.
For self-employed, domestic workers, or own-account workers, as much as for farm workers, facilitating the payment of contributions is critical (as the experience of many countries has shown). Many employers and workers in the informal economy face practical difficulties in paying social insurance contributions for different reasons. Own-account workers, as well as some other categories of the self-employed, may not have the necessary IT skills, knowledge, and/or the time to provide, prepare, process and send the information requested and effect payments.
The level of contributions is an economic barrier to participating in a contributory social insurance scheme. That is why the state entered the picture in many countries, and it should do the same in India, too; incomes of agricultural workers often follow seasonal patterns, making monthly contributions difficult. The latest effort on social security—the Social Security Code, which merges nine central labour enactments—unfortunately, does not spell out any such vision.
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Our roadmap is a two-pronged strategy to incrementally cover 91% of India’s workforce within 10 years, which is informal. The strategy should be a dual-track one; one track would involve a top-down approach, the other a bottom-up one. The top-down one essentially involves an increase in those workers who are registered with the EPFO/ESIC system. That process has been set in motion, through GST registration. The larger unregistered MSMEs have, since July 2017, found it in their self-interest to register with the GST, thus declaring themselves to tax authorities. While this led to some new firms getting registered under the GST, it has not meant that their workers are also registered for the EPFO/ESIC system. This requires correction. The PM’s Rozgar Protsahan Yojana has incentivised registration with EPFO by the government of India committing to, for three years, pay for enterprises that register new workers (earning <Rs 15,000 per month, which is a very restrictive requirement) with EPFO, will actually be compensated by the government the full amount of EPFO contributions for workers. The expansion of this process would constitute the top-down part of the dual-track approach.
The other track will focus on coverage for the poor in the first five years, starting immediately. That, however, would require a totally new approach—the potential for which has been opened by SS Code 2020. However, all workers would first need to be registered. A beginning has been made in this regard by the e-Shram portal, where 250 million workers have self-registered. Registration must expand.
Contributory and non-contributory both have been utilised across the world to extend coverage. However, it is essential to ensure effective coordination between contributory and non-contributory benefits for the continued coverage of workers. This combined approach is important in India, where workers transition from being formal workers (with access to EPFO and ESIC) and then into informality and then back again. The introduction in India of GST has significantly raised the number of erstwhile unregistered firms now registered with the GST. However, that has not necessarily translated into registration of the same firms with the social insurance organisation, EPFO.
Many countries have created one fund, to which both formal and informal workers contribute. However, in India, this is not possible, as the earlier version of India’s SS Code of 2020, which provided for one fund for formal and informal workers, was rejected by many trade unions. The trade unions felt there would be a risk if one fund was created, of cross-subsidisation by organised sector contributory fund of the unorganised sector non-contributory schemes.
The author is Research fellow, IZA Institute of Labour Economics, Bonn