Social security for all India’s informal workers is possible. Here’s how.
Social security for all India’s informal workers is possible.  Here’s how.

Social security for all India’s informal workers is possible. Here’s how.

As much as 91% of India’s workforce of 475 million is informal, and therefore lacks social insurance. It includes everything from national pension and disability insurance to maternity benefits.

The latest government effort on the social security front is India’s Social Security Code 2020 (SS Code), which merges eight existing laws. However, we find that the SS code is deficient and therefore clarifies the principles and designs that will guide the government’s efforts in the future to ensure social insurance for informal workers.

In 15-20 years, India will become an aging society. Its demographic benefits will be over; GDP growth will slow down and millions will need old-age pensions. Is the country prepared for this?

Problems with the Social Security Act

SS Code 2020 merged eight existing social security laws, most of which concerned only formal enterprises, not informal ones; this bias still exists in SS code 2020. The amalgamation of a number of laws does not correspond to an advance on the eight already existing laws. The purpose of a single code can not simply be to consolidate laws that in 7 out of 8 cases belong to the 20th century. Second, a social security system cannot depend on the size of the company, defined by the number of workers. However, the Code is based on a system of thresholds defined by the number of workers employed in a company [e.g. 10 workers for Employee State Insurance Corporation (ESIC), 20 for Employee Provident Fund Organisation (EPFO)].

Third is a principle that every country must recognize that there should be a vision and a goal of universal social insurance within a defined time frame. That does not make the SS Code 2020 adopted by the Parliament of India. Fourth, all companies should be registered on a mandatory basis, and workers working for them should also be registered by the same company. There is no such provision in SS Code 2020.

Fifth, any social insurance currently available to informal workers is voluntary (Atal Pension Yojana, Shramjivi Maandhan). The SS Code (2020) should have made social security mandatory, and within 10 years all disorganized workers regardless of sector could be covered. It did not.

The design and architecture

India can provide social security to its informal workers. The plan is financially and administratively feasible. Many informal workers fall below India’s national poverty line – they accounted for 22% of the country’s population in 2012-12, the last year in which official poverty calculations are available. Globally, there are three ways to finance a national social security system: employer and employee contributions; non-contributory of either, where premium costs are covered by state tax revenue; and a combination of the two methods.

Given the high differentiation between different groups of informal workers in India, there are three categories of beneficiaries. One, non-contributory for the poorest (where the state covers the cost of taxes). Two, partial contributions from the non-poor ordinary (but informal) wage workers as well as the non-poor self-employed, supplemented by government subsidies for their contributions (found in many Asian countries), while employers make the full contribution. And three, for the formal workers, full employer and employee contributions under the EPFO ​​system.

To eliminate fragmentation, the first two should be part of the same system, as they are the disorganized informal workers. The third category already consists of public and private formal workers in organized enterprises.

Costs and financing

We estimate that the total cost of covering the poor 20% of the population will reach Rs 137,737 billion (or Rs 1.37 trillion to cover all the poor elderly, pregnant and the cost of death / disability) in 2019-20. This would only cover the two lower deciles of the working population, i.e. the designated poor (based on the socio-economic and caste count). This amount can be compared with the EU Government’s annual total expenditure under all heads of approx. 34 trillion Rs in 2019-20. In other words, the total cost of social insurance for poor informal workers, we estimate, is 0.69% of GDP in 2019-20 (ie in 2019-20 prices); as this will be shared equally between central and state governments (on a 50-50 basis), the cost to all state governments combined will be barely 0.35% of GDP annually; similarly for the EU government it will be around 0.35% of GDP.

The cost will decrease with each year as a share of GDP to 0.61% of GDP in the fifth year, after securing benefits for the existing stock of all types of beneficiaries in the very first year, which is currently revealed.

India needs comprehensive legislation which includes regulation of work, social security and redress for workers in the disorganized sector. Photo: Reuters

Ongoing expenditure on social security and welfare

We have estimates of what the EU and state governments currently spend annually from India’s consolidated fund. In 2019-20, the total expenditure on social insurance according to the annual report from the Ministry of Labor and Employment (MOLE) is approximately DKK 19,000 million. Rs. However, Rs 18,000 crore of this is on organized sector social insurance (Rs 5,097 crore on EPFO ​​Employees Pension Scheme, Rs 12000 crore on ESIC). The remaining schemes will absorb minimal amounts of funds (Rs 155 crore and Rs 300 crore in 2019-20) for two disorganized workers’ schemes.

However, the state governments of India spend much more on social security: Rs 146,629 crore. Yearly. These are expenses for all states in India on a head called ‘Social Security and Welfare’. But to be precise, these are all citizen-centered schemes and are not intended to provide comprehensive coverage for informal workers – which is our intention. What is clear, however, is that the state governments are already spending a significant amount of money, which in our opinion should be redirected to cover all informal workers. Citizens who are not workers in the meantime may still be trapped in social assistance schemes.

Administratively and fiscally possible

This form outlined above cannot be implemented without the registration of all informal staff. A start has been made with the E-Shram portal (by MOLE), where 212 million workers have been registered in January 2022. However, this is very deficient for all informal workers. We have shown elsewhere how the rest can be registered (including own workers and farmers). With the political will, this is administratively possible.

The costs are feasible for tax purposes, as covering the poorest will require only 0.69% or less of GDP per year over the next five years. By covering the non-poor through a contribution (for employers of ordinary workers who make up a quarter of all Indian workers) and subsidized to employees, the scheme would require additional tax costs that can be covered by growing tax revenues from a growing GDP when India is a fast-growing path again – five years later.

Santosh Mehrotra is a researcher at the IZA Institute of Labor Economics, Bonn, Germany. Jajati Parida teaches economics at Central University of Punjab.

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