COMMENTARY

Reforming Social Protection

for Economic Transformation
Dev Nathan

India is a low middle-income

economy with a development
policy that aims to promote
it to a high middle-income
economy, which requires both
economic growth and structural
transformation. This article turns
the spotlight on some aspects
of structural transformation,
such as the movement to
higher productivity jobs, the
formalisation of the vast informal
sector, and the promotion of
women as economic agents. The
experience of other economies
shows there is room for a higher
share of social protection
expenditure in India, but bringing
that about would depend on
increasing tax revenue and
reducing subsidies that are not
for the poor.

This note is part of work supported by IDRC

under SARNET, the South Asia Employment
and Social Protection Research programme.
Dev Nathan (nathandev@gmail.com) is with
the Institute for Human Development, New
Delhi, and Duke University.
Economic & Political Weekly

EPW

september 20, 2014

ndia is now a low middle-income

economy and the aim of development policy is to promote its passage
to a high middle-income economy,
which requires both economic growth
and structural transformation. Attention
is concentrated here on a few aspects of
structural transformation, such as the
movement to higher productivity jobs,
the formalisation of the vast informal
sector, and the promotion of women as
economic agents. Emphasising the role
of social protection in aiding economic
transformation and growth does not
mean neglecting its usually accepted
objectives of increasing the well-being of
households and individuals below an
acceptable minimum standard, and of it
being an income and consumption stabiliser during economic downturns. Social
protection is here taken to be a combination of non-contributory social assistance,
and labour programmes, such as the
Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).
Setting the Scene
Two facts have to be stated before going
on to the discussion. First, Indias level
of social protection expenditure is low
for a middle-income economy. The average for middle-income economies is
8.9% of gross domestic product (GDP),
while Indias is less than half of this (ILO
2011). Taking health expenditure alone,
India is quite low in public contribution
to health expenditure just 33% against
BRICS (Brazil, Russia, India, China and
South Africa) peers such as Chinas 56%,
Brazils 46%, and South Africas 48%
(World Bank 2014). Our middle-income
neighbour, Sri Lanka, is at 40%, which
itself is a comedown from 45%, very
likely because of high military expenditures during the civil war.
Second, a number of countries
Germany, Japan, and South Korea
prominent among them had universal
vol xlIX no 38

health insurance, an important component

of social protection, when they were still
low-income or low middle-income economies (Bender et al 2013). What the two
facts show is that, on a comparative basis,
there is room for a higher share of social
protection expenditure in India. But bringing that about depends on increasing the
share of tax revenue to GDP and reducing subsidies that are not for the poor.
Facilitating Transformation
Economic transformation is a painful
process. It often involves the replacement
of one set of economic activities by another.
It could be industrialisation or mining in
agricultural areas, or even the mechanisation of agriculture. Over time, as economic
growth takes place, new jobs will be created, but there is inevitably a lag between
the destruction of old jobs and the acquisition of new jobs by those displaced.
If household consumption at least during the lag is covered by social protection,
opposition to the adoption of new and
more productive activities could possibly be less than otherwise. An analysis
of pre-Industrial Revolution England
(Sretzer 2007) points out that the existence of parish-based social protection
could have decreased opposition to the
mechanisation of agriculture, which
was much less in England than on the
European continent, where such social
protection did not exist.
Of course, social protection cannot
recreate livelihoods. There will have to
be a deliberate policy of creating sufficient numbers of low-skilled jobs for
those displaced by mining and industrialisation. But a social protection cover
will facilitate any such movement from
lower productivity agriculture to higher
productivity mining or industry.
Should social protection to help the
above type of transition be narrow or
broad-based? A below the poverty line
(BPL) type of identification in the case of
displacement will be too narrow, since
even reasonably above the poverty line
(APL) households will see a sharp fall in
consumption when old livelihoods are
lost. This would point to the need for
broad-based social protection to facilitate
economic transformation from lower to
higher productivity activities.
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COMMENTARY

Another reason for making social protection broad-based and not just for, say,
workers in the informal sector is that
such restriction makes the transition
from informal to formal status more difficult. In an informal enterprise, wages
are subsidised by social transfers. But in
a formal enterprise, where employers
have to make various contributions, such
as provident fund or health insurance,
employers in effect pay a tax on wages.
The subsidy through social protection
and tax through employer contributions
increase the productivity gap that needs
to be covered to promote formalisation
of enterprises (Levy 2008). Not restricting state-provided social protection to
the informal sector alone would reduce
the barrier to formalisation.
Another aspect of economic transformation is migration, drawing out surplus labour from agriculture. Unlike displacement, migration is based on an assessment of the difference between potential earnings in the destination and
source areas. But even where potential
earnings are much higher in destination
areas, there would be, at the least, a
time lag before destination earnings
actually become greater than source earnings. The availability of social protection
would support the migrating households

consumption in the interim, and thus

reduce the social cost of migration.
Here too, the earlier mentioned analysis of pre-Industrial Revolution England
points out that parish-based social protection helped promote migration to
London and other rising economic centres. But for this beneficial effect, social
protection rights needed to be portable,
something that individuals and households can take with them. This is unlike
the MGNREGA, where the employmentbased income benefit is only available in
a persons village of residence.
From the above, one may conclude
that to promote the process of economic
transformation, social protection measures should be both broad-based and
portable. Further, social protection is
now largely based on the household and
not the individual. There are a few
transfers, like the old-age pension, that
are given to the individual, even if the
household takes it. But food security,
kerosene, or liquefied petroleum gas
(LPG) transfers are to the household. Is
there a case for shifting to individualbased transfers, particularly to women?
In the first place, individual-based
transfers would support womens emergence as economic agents and not just
subsume everything under the household.

Further, women, in the conventionally

defined labour force, are mostly selfemployed persons in low-earning activities. Their gendered responsibility for
household maintenance, combined with
their general lack of assets, makes them
risk averse and unable to invest in higherearning, but more risky activities. Providing them independent access to social
protection transfers could increase their
ability to invest in riskier but higherearning activities. When these transfers
are in the form of cash (or direct benefits
transfer as the roundabout jargon that
has come up in India has it), it is easy to
make all transfers to each adult in the
household instead of to the so-called
head of the household.
Patronage and Leakages
A major problem with BPL-related targeting is that it often requires political patronage and/or some payment to secure inclusion in the BPL list. This reduces the actual
income transferred to the poor. It also
subverts democracy, since access to income transfers can be translated into votes.
On both of these counts, it is desirable to
move away from a BPL-identification based
targeting. But does moving away from
BPL targeting mean that everyone will
have to be paid the transfer amounts?

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september 20, 2014 vol xlIX no 38 EPW Economic & Political Weekly

COMMENTARY

Employment schemes, especially those

based on provision of manual labour at
or around prevailing wage rates, have a
self-targeting character. They are less
likely to lead to an exclusion error, while
also not including many above the poverty
line. For other schemes, there could be
some simple and easily verifiable selection
criteria, such as excluding all above a
certain size and quality of house. Making social protection universal does not
mean making transfer payments to all,
but utilising both self-selection and easily
verifiable, broad criteria for exclusion.
But there will be some increase in coverage, which makes it all the more important
to reduce leakages and the cost of delivery.
The public distribution system (PDS)
provision of food has two major types of
increases in the cost of delivery. One is
the sheer warehouse-cum-transport based
cost of physical delivery. The other is the
pilfering of food through ghost and duplicate cards. In erstwhile Andhra Pradesh,
for instance, there were more ration cards
than households in the state. In MGNREGA
employment, such ghost workers are a
source of pilfering of money from the
exchequer. A biometric identification
system, such as Aadhaar, is a big step in
reducing the cost of delivering social
protection by eliminating the stealing of
funds through duplicate and ghost cards.
The other measure that would reduce
the cost of delivery is, of course, that of
switching from provision of goods to transfer of money. The logistic cost of delivering food and other commodities would be
eliminated by the shift to money transfer.
And, instead of a separate delivery mechanism for each type of transfer, there
would be just one delivery mechanism.
In addition, cash transfer would allow
individuals and households to decide on
their priority uses of the transfer payments at any time. For instance, at the
beginning of the school year, school
expenses may be the main priority. Or,
at harvest time, when labourers are paid
in kind, they would not need extra grain
through the PDS.
Social Protection and Growth
Social protection expenditure is usually
seen as consumption, a deduction from
revenues, competing, for instance, with
Economic & Political Weekly

EPW

september 20, 2014

government investment. There is admittedly a short-term resource allocation

problem. But does not social protection
also contribute to growth? This is a topic
not often discussed in the social protection literature, though some like Lindert
(2004) have been arguing that social
protection is, in fact, a free lunch in that
it pays for itself by increasing productivity. Can social protection not be social
consumption but social investment?
One way in which social protection
can be investment is through linkages
with investment in the workforce. For
instance, the mid-day meal scheme
(MMS) is an income transfer to poor students. It has been instrumental in increasing school registration and attendance.
At the individual level, literate adults
can earn more than those who are
illiterate. And, since in most jobs we can
assume literate workers to be more
productive than illiterate workers, the
MMS definitely contributes to increasing growth. Again, the availability of
health cover could induce workers to
seek care in the early stages of an illness and not postpone it till the condition becomes serious. This too could
reduce worker absenteeism and thus
reduce production costs.
To summarise, social protection can
have an impact on productivity and thus
growth at three levels (Alderman and
Yemtsov 2012). It works at the micro
level through increasing worker productivity and enabling the self-employed to
take up more productive, though risky
investments. It can work at the meso or
community level by building community
assets, for instance, through efficacious
use of the MGNREGA. And, it can also
have benefits at the macro level by
stabilising aggregate demand, as occurred in India at the beginning of the
recession. Even more important at the
macro level, social protection can help
promote political acceptance of the
transformations that are key to building
a modern economy.
An area of social protection that has
received little attention in India is related
to the growing demand of employers for
flexibility in employing labour. But along
with flexibility, which could be promoted by abolishing Section V-B of the
vol xlIX no 38

Industrial Disputes Act requiring state

permission to retrench workers (without
going into the whole gamut of labour
legislation that needs rationalisation),
there is the need for the consumption
security of retrenched workers and their
families. One proposal has been to increase the compensation for retrenchment to up to two months of salary for
every year worked (Papola and Pais
2007). But consideration needs to be
paid to the extent to which the state can
provide the needed well-being security
during employment transitions, as is
done in east Asia and Europe. Similarly,
shifting the burden of bearing maternity
costs from the employer to the state
could reduce the bias against employing
women as skilled workers.
In going into the next stage of Indian
economic development, it is necessary to
pay attention to ways in which social
protection can promote structural transformation, contribute to increasing productivity and thus economic growth,
and enable a flexible labour policy while
protecting workers well-being in transitions. Changes, particularly those that
involve increased government expenditures, can, however, only be undertaken
step by step and that too to the extent
that the share of tax revenue to GDP
increases and some subsidies that do not
reach the poor are reduced.
References
Alderman, Harold and Ruslan Yemtsov (2012):
Productive Role of Safety Nets, Social Protection and Labour, Discussion Paper, No 1203,
March, World Bank.
Bender, Katja, Markus Kaltenborn and Christian
Pfleiderer, ed. (2013): Social Protection in Developing Countries: Reforming Systems (London
and New York: Routledge).
ILO (2011): World Social Security Report, 2010-11
(Geneva: ILO).
Levy, Santiago (2008): Good Intentions, Bad Outcomes: Social Policy, Informality and Economic
Growth in Mexico (Washington DC: Brookings
Institution).
Lindert, Peter (2004): Growing Public: Social
Spending and Economic Growth, since the Eighteenth Century (Cambridge: Cambridge University Press).
Papola, T S and Jesim Pais (2007): Debate on
Labour Market Reforms in India: A Case of Misplaced Focus, Indian Journal of Labour Economics, 50 (2): 183-200.
Sretzer, Simon (2007): The Right of Registration:
Identity Registration and Social Development,
World Development, 35, 2: 67-86.
World Bank (2014): World Development Indicators,
http://data.worldbank.org/data-catalog/worlddevelopment-indicators

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