Although economic growth has reduced poverty rate, the pace of poverty reduction has slowed down, and poverty vulnerability also has increased. India still has the largest number of people on earth living in near poverty, and even though they may not be currently poor, they are highly vulnerable to falling back into extreme poverty.
By Ejaz Ghani
The author is lead economist at the World Bank
India, one of the fastest growing economies in the world, has a social protection system that may be outdated. Its social protection was founded in the 1970s, when half of the population was chronically poor, and most of them lived in rural areas. India’s economy has undergone a sea change during the last three decades. Increased investments in physical and human infrastructure, rapid urbanisation, young demographics and productivity-enhancing reforms have increased the pace of economic growth. India is urbanising at 100 times the pace at which the UK had urbanised, and the country’s urban population will soon reach 600 million people, twice the size of America’s.
Although economic growth has reduced poverty rate, the pace of poverty reduction has slowed down, and poverty vulnerability also has increased. India still has the largest number of people on earth living in near poverty, and even though they may not be currently poor, they are highly vulnerable to falling back into extreme poverty. Nearly 80% of jobs in India are created in the small informal enterprises, and these come without a social protection. Social protection systems in rich countries were developed at a time of “jobs for life,” and such traditional social protection systems were seldom adopted in India.
The coverage of formal social insurance in India remains in single digits, with virtually no increase detected over the past decade. Disruptions brought about by the introduction of the goods & services tax (GST) and demonetisation may have come with heightened risks to the poorest households, due to the increased burden of compliance on small and informal firms. India’s current social protection system is not well developed to deal with contingency risks.
Future growth may also become less inclusive and less distribution neutral. The Fourth Industrial Revolution and technological innovation have increased productivity growth, but also slowed down the pace of job creation globally, especially in the manufacturing sector. Capital is increasingly substituting for labour, and the share of labour in value-added is declining. A rising tide is no longer lifting all the boats. Improving social protection against increased contingency risks and poverty vulnerability requires second generation challenges of expanding social protection instruments to deal with new risks.
The traditional approach to social protection was based on the view that there is a clear trade-off between growth versus equity, and increased social protection will create moral hazard problems, and compromise growth. However, empirical evidence has shown that social protection also provides dynamic efficiency gains to the economy through positive impacts on productivity. Increased social protection contributes to a faster pace of economic growth by allowing individuals to better manage risk/return choices.
Over-reliance on the traditional mode of providing social protection, through government and publicly-financed programmes, restricts the potential for scaling up social protection, due to fiscal constraints. There is a huge potential for maximising finance for social protection through increased public and private partnerships (PPPs), as it broadens the pool of potential financing to maximise social protection. The PPP model, which is well developed in building physical infrastructure in India, is still in its infancy in the development of social infrastructure. Given the growing demand for social services, operator-led PPPs provide an opportunity for innovative and collaborative service delivery in scaling up social infrastructure in India.
Targeted credit, livelihood interventions, crop insurance, new healthcare facilities, education, and low-income targeted public housing are examples where social protection can be scaled up through increased PPP. The PPP model transfers operational risks from the state body to the private partner and forces the private sector to take a long-term social view of the project. Social protection could be scaled up to help informal sector workers. Once basic protections are in place, people could keep upgrading their security with various progressively-subsidised schemes. Social protection can also help take pressure out of minimum wages when these are set too high.
In addition, there is a huge potential for scaling up the participation of communities as a vehicle for delivering social protection. For example, lagging educational enrollments. These can be traced to low community participation in education service delivery, especially for girls. This requires placing investment funds at the local community level and giving the local communities a stronger voice in the allocation of these funds. Given a history of inefficient central planning, and the shift towards competitive federalism, it open new doors for increased local community participation as a tool for a more effective social protection system.
Women shoulder a disproportionate share of unpaid work, and gender imbalances in the distribution of family care work constitute a root cause of women’s economic and social disempowerment. While the role of gender in social protection is complex, increased focus on the types of risks tackled by women need attention. Far more can be done in terms of integrating gender into the design and implementation of social protection, including policies that enable women to better balance family and job agenda.
India’s declining return on public spending on poverty programmes is an emerging challenge. The current social protection programme has not responded well to the growing spatial diversity in living standard and poverty rate within India. A key reason for this is that while poverty is getting increasingly concentrated in the lagging regions, the absorptive capacity for social protection in lagging regions is also much weaker, due to institutional weaknesses, and often handicapped by misidentification of beneficiaries. This reduces the poverty reduction impact of social programmes. A combination of government, private sector and local community participation could address institutional deficiencies, and increase return on investments in social protection and poverty reduction. Outdated information on poverty and employment indicators needs to be updated.
India’s social protection needs to be reshaped to address increased poverty vulnerability and increased uneven playing field. The declining share of labour in total income and accumulation of capital wealth in the hands of a few have raised concern. We need new ways of scaling up social protection for 80% of working people in India who have no or little access to social protection. There are many options available for maximising financing for social protection, including scaling up partnerships between public, private sector and local communities, and increasing progressivity in tax base that complements labour income taxation with the taxation of capital, in a country where the richest 1% hold more than 50% of the country’s wealth.