Social Security for Unorganised Sector
market. As mutual funds cannot provide a guaranteed return, indirectly such a
A Major National Initiative
guarantee should be provided by the
For the first time in India a comprehensive social security scheme for the unorganised sector has been proposed. The proposal by the National Commission for Enterprises in the Unorganised Sector seeks to develop a healthy workforce that in turn will have a positive impact on national income and economic growth. The scheme aims to cover sickness, maternity, old age and death and proposes a participatory system with some contributions
from the workers.
K P KANNAN, RAVI SRIVASTAVA, ARJUN SENGUPTA
An Overview of the Scheme
T
The details of the scheme are given in the report [NCEUS 2006]. When all the informal workers are covered, the central government contribution will be Rs 20,583 crore (including pension to below the poverty line (BPL) workers and administrative expenses) and the contribution of state governments will be Rs 4,819 crore. As a percentage of GDP, this works out to 0.48 per cent in the fifth year. However, the whole scheme is to be completed within a period of five years covering one-fifth of the eligible informal workers every year. The financial implications of such a phasing are given in Table 2.
Implementation
Except the old-age security, all the other social security benefits are based on the insurance model. This makes it possible for delivery of the benefits by independent agencies functioning on the basis of the insurance business model. It will be the responsibility of the national board as well as the state boards to ensure the best possible deal by selecting the appropriate service provider. While life insurance products are well tested and are offered to widely dispersed poor populations both by the LIC and the department of posts, there is limited experience with health insurance for this segment of the population. Some of the pertinent issues with respect to the proposals for health cover are discussed below.
In the case of provident fund for above the poverty line (APL) workers, it can be managed by a mutual fund. A guaranteed annual return of 10 per cent has been proposed since the small savings of the poor unorganised workers should not be subjected to the vagaries of the capital National Social Security Fund that will make up whenever there is a deficit in the yield below 10 per cent, and retain any surplus whenever the yield in the mutual fund is above 10 per cent. Historical experience suggests that the Indian capital market has done reasonably well to ensure the delivery of the proposed return – even with adequate risk hedging – with the yield from the high return years will most likely cover the low returns of the different periods.
The real challenge here is in collecting the contribution of workers over the breadth and length of the country and ensuring timely delivery of services. The commission has carefully examined this issue and after discussions with the department of posts has recommended that the vast network of the postal system be taken advantage of this national project. There are at present more than 1,56,000 post offices in the country and the system has long-standing credibility as well as accessibility to common people. The department of posts is willing to undertake the collection of contributions from the workers as well as the government through its network. It could also function as a bookkeeper to the social security system by the bookkeeping accounts and making payments to the
Table 1: Salient Features of Social Security Scheme
Item Details
Coverage Benefits
Health insurance
Life insurance Old age security
Contribution
Financing
Additional commitments by central government organisation 30 crore unorganised workers to be covered in five years.
For self and family. Cover for hospitalisation up to Rs 15,000; maternity up to Rs 1,000 per delivery; disability allowance up to 15 days at Rs 50 per day; accidental death cover for worker of Rs 25,000. Rs 15,000. All workers above 60 years belonging to below the poverty line households to receive pension at Rs 200 per month. Other workers will have a provident fund. Re 1 per day or Rs 365 per year by worker, employer and government. In view of the difficulties in identifying employers, government to pay employers’ contribution also, i e, Rs 730 per year in the ratio of 3:1 by central and state governments. The contribution of workers belonging to BPL households to be paid by the central government. Through a cess or social security tax. Payment of Rs 200 as old age pension to BPL workers plus administrative expenses. National Social Security Board at the central level to manage a national social security fund; state level boards to manage state social security funds; and workers facilitation centres (WFCs) at the local level for registration, etc. Department of posts to collect contributions and bookkeeping
Economic and Political Weekly August 12, 2006 service providers as required by the concerned state boards or the national board.
Some Issues for Discussion
Anything that involves additional public expenditure, especially those relating to some kind of social protection to the poor arouse vigorous public debate in the country portraying how wasteful such expenditures are going to be. Usually, it is portrayed as a subsidy as opposed to incentives when it is meant for industry or business. Ultimately, of course, it is a matter of political choice determining the balance between macroeconomic policy and macrosocial policy. Notwithstanding such issues of political economy, we also realise that in a developing country such as India, social security arrangements to the working poor have wider ramifications to the macroeconomic performance. A measure of social security helps to develop a healthy and contented workforce capable of enhancing their contribution to national income and thus enhance the capacity of the economy to grow. A workforce with higher capability and security could contribute to higher growth, which in turn, would enhance the aggregate demand in the economy through higher purchasing power of this vast mass of workforce. The mutually reinforcing nature of this relationship needs to be recognised and capitalised.
When a major national initiative is proposed as the one here under discussion, it is natural that there will be many questions that need to be addressed. Here we attempt to answer a few questions that have come up in discussions, including those in the public sphere, with a view to clear the ground. What is the fundamental difference of this proposed initiative from that of the earlier ones?
The first fundamental difference is that it is a rights-based one in the sense that what is proposed is in the form of legally enforceable entitlement unlike the very many schemes floated by the central and state governments at different points of time. In this sense, this social security initiative is in the same class as the National Rural Employment Guarantee Scheme. The second difference is that it makes all unorganised earning workers eligible irrespective of their occupation or duration of employment. The third major feature is that it provides a national floor level social security for all the informal workers throughout the country to which state governments may add on their contributions or additional benefits, if they so choose.
What happens to the existing social security schemes for informal workers available for some occupational groups and those in some states?
Some scholars have expressed doubts about the fate of existing social security arrangements of the state and central governments covering some sections of the unorganised workers [see Hirway 2006]. It was made amply clear first in the draft bill submitted by the National Commission and subsequently through the recent report that the proposed scheme will in no way disturb the existing schemes. What is clearly envisaged is the establishment of a national floor level social security with sufficient scope for state governments to add. This can be easily done through the proposed organisational structure. Existing schemes can be brought into the purview of the state level social security board and may be merged with the proposed scheme or retained as additional benefits as the case may be. Why has the commission opted for a defined contribution-based scheme rather than one based on defined benefits, based on adequacy norms?
The commission has opted for a defined contribution approach so that the workers will have a stake in the functioning and sustenance of the scheme. At the same time, the commission considers that the benefits from such a scheme, although small, can make a significant dent on the vulnerability of poor informal sector workers. The commission has reiterated that it has proposed a national minimum, to which add-ons are possible. The important issue at this stage is to develop a political consensus around a national minimum social security package and to set up an effective national level implementation structure.
Why was a funded pension not recommended?
This question has been raised by some commentators who suggest that new pension system being implemented by the central government allows for a feasible funded pension for unorganised workers [see Bharadwaj 2006]. A closer look at the new pension system suggests that it is primarily meant for government employees recruited after 2004. The employees are expected to make a contribution of 10 per cent of their earnings with a matching contribution from the government. There is a window for other employees to join the scheme but there will not be any contribution from the government. This essentially makes it a private pension fund contributed through one’s own savings, an option that is already there in the market through pension fund schemes created by mutual funds and insurance companies. It is after considerable deliberation and examination of alternatives that the commission decided to recommend a provident fund scheme for workers belonging to the APL households, with two-thirds of the contribution from government. However, it was found necessary to provide a minimum old age security to the BPL workers, who were the most vulnerable segment, irrespective of the period of their registration. Hence a monthly pension of Rs 200 has been proposed for all such workers, through an extension of the National Old Age Pension Scheme. Given the limited experience how will the proposed health insurance be implemented?
This calls for some detailed planning and preparation in each implementing state.
Table 2: Phasing of the Coverage and Expenditure of Centre and States
(Rs crore)
Year Number of Workers (Crore)
APL BPL BPL Old Aged
12 3
| Central Government State | Admini- | Costs | as | ||
|---|---|---|---|---|---|
| Expenditure | Gpvern | strative | Percentage of GDP | ||
| Towards | ments | Ex | at Market Prices | ||
| Contri- | Pension | Contri | p e ns e s | Centre+ | Centre |
| butory | of Old | bution- | Admini | and | |
| Schemes | BPL | strative | States+ | ||
| Workers | Expenses | Admini | |||
| strative | |||||
| Expenses | |||||
| 4 | 5 | 6 | 7 | 8 | 9 |
2006-07 4.62 1.38 1.35 3140 3244 964 290 0.17 0.20 2007-08 9.24 2.76 1.37 6280 3292 1928 579 0.24 0.29 2008-09 13.86 4.14 1.39 9420 3340 2892 869 0.30 0.36 2009-10 18.48 5.52 1.41 12560 3387 3856 1158 0.35 0.43 2010-11 23.10 6.90 1.43 15701 3434 4819 1448 0.39 0.48
Notes: (i) Figures indicate the financial expenses as a percentage of GDP including administrative costs.
(ii) GDP at market prices is expected to grow at 8 per cent per annum in the next five years.
Economic and Political Weekly August 12, 2006
It is true that several general insurance companies do market health insurance products for various segments of the population. The commission has recommended a cashless model for hospitalisation expenses by which the beneficiaries will be able to access the services of hospitals. The general insurance companies, especially those in the public sector, have the experience in implementing such a model under which the insurance providers appoint third party administrators. This calls for the state boards to designate healthcare institutions for this purpose. The commission has recommended public healthcare institutions, cooperatives and charitable institutions as well as private hospitals that meet the minimum requirement of infrastructure. We are aware that the implementation of a cashless system would require a state of readiness on behalf of the public and private hospitals in far-flung areas. Further, public healthcare institutions, as they are constituted now, have user charge policies that vary across states and for different categories of consumers of health services. In the case of poor patients, these services are usually provided free of charge or at highly subsidised rates. In practice, patients have to bear a portion of the direct costs due to the provider’s inability to offer all required services. As per the commission’s recommendations, the public providers would be able to recoup some part of their costs from the insurance agencies through a schedule of rates, which may be distinct from actual user charges.
It has been pointed out by insurance providers that they will be prepared to take care of a maximum of 70 per cent of claimto-premium ratio, and would be prepared to offer a discount if the claim ratio is lower than this figure. But there is no reason why this ratio cannot be enhanced to a higher figure, say, to 80 per cent. Assuming that each illness requiring hospitalisation leads to a claim of the maximum allowable per illness (Rs 10,000), the percentage of policyholders requiring hospitalisation and receiving compensation up to the limit of risk cover, works out to 2.67 per cent. This is considerably higher than the current hospitalisation rate in India estimated at
1.67 per cent of the population (based on NSS 1999-2000).
Of course, the crucial factor in the success of this health insurance is the availability of infrastructure, especially in rural areas. We are aware that there is a wide variation on this account across states, but the recent efforts of both state and central governments to strengthen the health infrastructure should be taken into account. The introduction of insurance-based cover for the unorganised workers will be an added incentive since the hospitals providing the services are expected to receive the amount in their account. This demanddriven process should add to the pressure to improve the healthcare infrastructure in the country.
What about portability of the social security benefits especially for the reported vast number of migrant workers?
It has been estimated that migrant population (workers and non-workers) constituted around 27 per cent of the population in 1999-2000. However, most migration involves a change in domicile, and workers who are permanent or semi-permanent migrants should be treated on par with other workers on the basis of the principle of self-declared domicile. The main problem relates to seasonal or circulatory migrants, and migrant workers who are separated from their families. The estimate of seasonal and/or short duration migrant workers varies from 20 to 30 million constituting 5 to 8 per cent of the total workforce. The numbers involved are large enough to warrant an explanation about portability. Such portability has to extend to the registration and identification of the worker and his family, payment of contribution and accessing of benefits. Each of these covers a number of important issues, which acquire special significance for inter-state migrants. In principle, these issues can be resolved through issuance of identification cards with unique numbers to the worker and her family, and coordination between the agencies involved in the collection of contributions and payment of benefits. A lot of emphasis has been given to the working of the workers facilitation centres. How to ensure their effective functioning?
This is where the proposed social security system depends on the civil society instead of creating a vast network of bureaucracy at the local level adding enormously to the cost of enforcement. The WFCs are designated organisations of workers, NGOs working among informal workers, labour cooperatives, etc. If such organisations do not exist in some localities, the panchayat raj institutions will have to perform those functions. It is easy to dismiss this suggestion saying that in many states the PRIs at the village level do not have adequate administrative capacity. This may well be correct; the idea, however, is to see that the PRIs are strengthened so that they can discharge their responsibility for people at the local level. The constitutional obligation of setting up PRIs has been achieved – something that was earlier dismissed as not workable by many critics
– and the challenge now is to strengthen them to perform their tasks. This, of course, calls for state governments to assume a proactive role so that the organisational structures required are put in place.
The implementation of the scheme is contingent on the initiatives of the states. How to ensure that the states do come forward?
The proposed national law empowers the states to constitute state-level social security boards for implementation of the scheme. Apart from the fact that the proposed scheme has a universal coverage of all informal workers, 75 per cent of the government contribution is to be borne by the central government. In addition, the entire contribution of the workers belonging to BPL households will also be borne by the central government. These two provisions should act as adequate incentives for the states to come forward and implement the National Social Security Scheme. However, organisations of workers and other concerned civil society organisations will have to exert pressure from below so that the state governments do not shy away from their responsibility. Why this distinction between BPL and APL workers? Why cannot all be treated as one group with or without contributions?
The commission’s proposals are based upon direct or indirect contributions by all the stakeholders, including the informal workers. The contributory principle aims at strengthening participation and accountability and has been recognised by all the major recommendatory bodies, including the Second National Labour Commission. Moreover, all the existing welfare funds providing social security to selected groups of unorganised workers are based on the principle of contribution by the workers. The commission has, therefore, recommended contributory social security scheme so that the beneficiaries have a stake in its working and can play a fully participative role in monitoring its performance. At the same time, the commission recognises that the nature of employment and low incomes of poorer informal sector workers are such that they lack the capacity to pay their contributions, however meagre
Economic and Political Weekly August 12, 2006 these might be, towards the scheme. Hence, it has recommended that the poor (BPL) workers be exempt from making contributions, which will be made by the central government on their behalf. The identification of poor households is undoubtedly fraught with problems and lists contain both inclusion and exclusion errors. The issue has also been engaging the attention of the Supreme Court. The commission has, therefore, refrained from proposing any alternative criteria for such identification at this stage.
Some workers’ organisations have argued for a lower contribution from the workers. In some consultations, a registration charge of Rs 100 and an annual fee of Rs 25 have been suggested. This alternative suggestion would raise the estimated government expenditure on the scheme to Rs 9,392 crore in the first year (0.24 per cent of GDP) and Rs 36,576 crore in the final year (0.69 per cent of GDP).
Concluding Remarks
This is for the first time in independent India that a comprehensive social security scheme for the entire unorganised workforce has been proposed with legislative backing. The whole scheme needs to be viewed as a package covering four different aspects of contingent insecurity and the eventuality of death (sickness, maternity, old age and death). Isolating one or the other for implementation will, in our opinion, defeat the very purpose of providing a floor-level social security, however modest, to the vast mass of the unprotected workers who contribute close to 60 per cent of the national income. Some people think, rightly so in our view, that the benefit package is too modest while some others have pointed out, as mentioned earlier, that the contribution from the workers is too high. Some workers’ representatives have even suggested a zero contribution from the workers. We have weighed the implications of these suggestions and have come to the conclusion that a participatory system with some contribution from workers is indeed desirable. At the same time, we have recognised the existence of poor workers and that logic has led us to recommend that their contribution should come from the central government. The benefit package is based on the response of potential service providers but we are of the view that the national and state boards should be in a position to negotiate for the best possible benefits.
The consideration of current fiscal situation has also been a factor in determining the total contribution to the scheme. Given the magnitude of financial resources envisaged, the scheme is, in our opinion, an eminently feasible one. However, in a democratic polity as the one we have, the ultimate decision will be a political one reflecting the priority assigned to the condition of the majority of the workforce. To strengthen the process of political decision-making, it is imperative for the democratic and civil society in the country and its organisations of, and for, the unorganised workers to create the much needed collective voice.
EPWEmail: Kannan.nce@nic.in
References
Bharadwaj, Gautam (2006): ‘A Safety Net with Holes’ in Indian Express, May 18.
Hirway, Indira (2006): ‘Unorganised Sector Workers’ Social Security Bill, 2005’ in Economic and Political Weekly, February 4.
NCEUS (2006): ‘Report on Social Security for Unorganised Workers’, New Delhi [The full text of the report is available in the website of the Commission http://nceuis.nic.in/.]
Economic and Political Weekly August 12, 2006
