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While the need to expand coverage is widely felt, there is no consensus on the road to be taken.

There is a consensus that India needs to expand the coverage of its social security schemes. Currently, at best 20-25% of the population is covered by at least one scheme, and the benefits provided are limited in many cases. There is, however, no consensus on the most appropriate option that India should pursue to attain this goal.

The need to expand coverage will become even more pressing in the future. India’s total workforce is currently around 450 million. According to a 2006 report by the Economist Intelligence Unit (EIU) titled ‘Foresight 2020: Economic, Industry and Corporate Trends’, between 2005 and 2020, India will need to provide meaningful occupation to an additional 142 million persons (equivalent to 30% of the world total). Most of the jobs will not be structured around formal employer-employee relationships.

The socio-economic characteristics of the persons involved in non-formal occupations are quite diverse, and this is not likely to change. These range from small farmers, artisans, self-employed women (the bulk), and agricultural and other labourers (around fifth of the total) to relatively well-to-do business persons and self-employed professionals. This suggests great diversity in terms of size and regularity of income, savings potential and overall awareness of the need for and ability to save for retirement. This heterogeneity requires different approaches and instruments in designing social security.

Dynamically, as the country continues to grow (according to the 2006 EIU report, India is expected to contribute about 12% to global growth between 2006-20; and account for 8.8% of the world’s GDP in purchasing power parity terms versus 6.2% in 2005), the number of absolute poor will continue to decrease, and the ability to save increase.

Life expectancy at age 60 of about 17 years and rising, implies that retirement income support will be needed for long periods. The morbidity and mortality patterns will vary across states, occupations, and ethnic groups. The above suggests the need will increasingly be for empirical-evidence-based, professionally-designed-and-managed social security schemes.

Two broad options for expanding the coverage are represented by the proposal based on social insurance of the National Commission for Enterprises in the Unorganised Sector (NCEUS) (Social Security Report available at www.nceus.gov.in), and the New Pension Scheme (NPS)-social assistance centred multi-pronged approach.

In a 2006 report, the NCEUS has advocated a comprehensive social insurance-based, government-run programme covering health benefits (hospitalisation, sickness allowance, and maternity benefit), life insurance, and provident fund (with provision for non-contributory pension for poor elderly workers). The report recommends coverage of 300 million workers over 5 years, i.e. 60 million persons per year. It does not project the future trends in unorganised sector employment.

This option has severe limitations.

First, it does not take sufficient cognisance of administrative constraints, particularly those relating to record-keeping, collection of contributions, management information systems, and paying the benefits in a correct way without any side payments. The experience with extremely poor record-keeping by the Employees Provident Fund Organisation, the civil service pension schemes, and the recently-launched National Rural Employment Guarantee Scheme does not inspire confidence. All these schemes have much smaller number of participants than envisaged just for the first year by the NCEUS, and they focus on only one type of benefit.

The transactions costs of administering and complying with the scheme are likely to be disproportionately high, given the low nominal amounts of contribution and benefits, and due to a plethora of national and state level administrative structures.

Second, combining different schemes with a diametrically opposed economics, and the need for sophisticated actuarial estimates on a disaggregated basis, into one overall social security programme is bound to lead to non-transparency, and mis-specification of actuarially appropriate contributions. Longer life expectancy for example should lead to lower cost of life insurance, but substantially higher cost of pensions and healthcare.

Third, the report does not give sufficient weight to managing the political risk which in the Indian context has a high probability of undermining the sustainability and integrity of even well-designed social insurance schemes.

Fourth, the report does not project finances over a long period (in the US, finances of such schemes are routinely projected for 75 years and are made available publicly); and treats financing issues in a cavalier manner, demonstrating little understanding of economics of social insurance. It is astonishing that the media report suggests that the chairman of the NCEUS indicated that financial costs of the scheme are not their problem but that of the government.

The report also implicitly relies on high administered interest rates subsidised by the government for managing accumulated provident fund balances. This defeats the purpose of mandatory savings because only when such savings are invested in growth-enhancing projects, can national savings increase?

Fifth, the nation-wide social insurance approach forecloses experimentation, flexibility and gradualism, which have been the hallmarks of India’s successful calibrated globalisation.

Sixth, the NCEUS programme will immediately and substantially increase demand, particularly for health services, but there is no analysis of how the corresponding increase in the supply of healthcare services will be achieved. These can not be increased rapidly as there is a long lead time. Even for the current demand, supply of healthcare facilities, particularly for lower income groups, is grossly inadequate and inefficient. This is largely the failure of government-provided or guided facilities. The NCEUS option will give these governmental organisations vastly expanded responsibilities.

(To be continued)

Mukul G Asher is professor of public policy, while Amarendu Nandy is research scholar, department of economics, National University of Singapore. The views expressed in this article are personal.