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India: Selected Issues

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International Monetary Fund
Published Date:
February 2008
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VII. India’s Social Protection Framework1

“I find we spend far too much money funding subsidies in the name of equity, with neither equity objectives nor efficiency objectives being met. Can we find more rational solutions to the problems of imbalances and inequities in growth?”

(Prime Minister Manmohan Singh)2

A. Introduction

1. Despite a remarkable reduction in poverty over the last three decades, India is still home to the largest number of poor people in the world. Between 1973/74 and 2004/05, the poverty headcount ratio fell by half, from 55 percent to 27 percent. Even so, roughly 300 million people are still below the poverty line. Income inequality, which has traditionally been relatively low in India, has increased over the last decade, reflecting in part the rising return to skills and education as the Indian economy develops.

2. Spending on social safety net programs in India has been broadly in line with other regional economies. According to official estimates, total expenditure on the major entitlement schemes was about 2.1 percent of GDP in 2006/07, with a further 2.2 percent of GDP spent on major input subsidies (food, fertilizer, and fuel).3

3. However, there is a common perception that the poor have not benefited from these programs. The Government of India has estimated that if the amount spent on subsidies and poverty alleviation programs in 1999/00 had been transferred directly to the poor and disadvantaged, it would have raised consumption sufficiently to eliminate poverty.4 Another concern is that social protection programs are still heavily geared towards poverty alleviation, and provide little social insurance. In particular (as noted by Dev et al. (2007)), India’s prevailing safety net programs do not seem to address the most dominant and pervasive risk of poor households, namely exposure to serious health risk. A shift towards greater provision of social insurance therefore seems warranted, given that India’s robust economic growth is likely to reduce poverty further, while rising dislocation associated with this growth (as some sectors flourish while others wither) raises the need for social insurance.

4. Strengthening the social protection framework is therefore an important plank of the government’s inclusive growth strategy.5 Spending on flagship programs (including rural and child health and school-related programs) has been raised significantly, while a series of new programs has recently been introduced, including a national rural employment guarantee and social insurance for informal sector workers. Efforts are also underway to increase the efficiency of existing programs. Over the longer term, the government aims to double total expenditure on education and health to 9 percent of GDP by 2012.

5. This chapter describes some of the larger programs under India’s social protection framework, and ideas for their reform. Section II presents the broad contours of India’s social protection framework, while Sections III–V provide a more detailed discussion of protective, preventive, and promotional measures, respectively. Some concluding thoughts are presented in Section VI.

B. Broad Contours of India’s Social Protection Framework

6. A comprehensive assessment of India’s social protection framework is challenging, given the large number of programs that could be considered part of the framework. As noted by Srivastava (2004), these expenditures can include investment in social and human capital and physical infrastructure; more direct poverty-targeting programs, such as primary education and basic health services; and interventions that explicitly seek to target the poor, and especially the poorest of the poor. In total, India spends about 4¾ percent of GDP on education and health (Figure VII.1), which compares relatively favorably with similar economies, but is considerably less than such spending in more advanced emerging markets.

Figure VII.1.Public Social Expenditure in Selected Countries, 2004

(In percent of GDP)

Sources: UNESCO; WHO; and IMF, staff estimates.

7. In India, hundreds of “centrally sponsored schemes” (CSS) are part of the social protection framework. The CSS are managed by a large number of ministries, which complicates their coordination and results in considerable overlap between them. Under the Common Minimum Programme (CMP), the government aims to focus its social sector spending on flagship programs (see Table VII.3 for examples), while gradually consolidating others. Such consolidation holds out considerable promise for increasing efficiency in the delivery of social benefits.

8. This chapter focuses on the largest programs (by expenditure), given their importance in terms of number of people affected, as well as their role in government spending. India’s social protection programs are discussed under three main headings6:

  • Protective measures provide relief against deprivation to the chronically poor, as well as those falling into poverty because of shocks. The principal program is subsidies for food and other key commodities (provided through the Targeted Public Distribution System). Other programs include social pensions and housing programs for the poor.

  • Preventive measures seek to avert deprivation prospectively by supporting households’ efforts to manage different risks and shocks ex ante. The would include unemployment insurance, health insurance, and old age pensions.

  • Promotional measures seek to improve incomes, both in the near term (through livelihood interventions) and in the longer term (through human capital interventions). Key programs for the former are targeted credit and workfare programs for the poor, and for the latter, interventions to support human capital investment (e.g., school stipends, midday meals, and conditional cash transfers).

C. Protective Measures

9. Protective programs represent the core element of India’s social safety net, reflecting its focus on poverty alleviation. The subsidized provision of commodities is the largest social assistance program in India, expected to cost around 2¾ percent of GDP in 2007/08. Other protective programs (on which spending is much smaller) include social pensions for the destitute elderly, the disabled, and widows, and targeted subsidies for rural housing.

Subsidies

10. The principal consumer subsidies are those provided for the consumption of food, fertilizer and fuel. Expenditure on subsidies has risen sharply in recent years, reflecting the rise in commodity prices. Additional “implicit” subsidies are provided on a range of non-public goods where users are identifiable and user charges can be levied.7 Net of such user charges, implicit subsidies amounted to an estimated 2½ percent of GDP in 2003/04.8 The high and rising cost of subsidies, combined with longstanding concerns about poor targeting of this benefit, has led to broad-based calls for revamping the subsidy framework.9

Food subsidies10

11. Targeted food subsidies for consumers are provided through the Targeted Public Distribution System (TPDS). The TPDS aims to reduce chronic poverty by providing essential commodities at highly subsidized prices, primarily rice and wheat, but also sugar, kerosene, and fertilizer. In 2007/08, food subsidies are projected at 1 percent of GDP.

12. The current system relies on household poverty as the basis for targeting. All “below poverty line” (BPL) households are entitled to a certain quantity of subsidized food. Families above the poverty line (APL) are able to purchase commodities at their market price. The central government—through the Food Corporation of India—is responsible for the procurement, storage, transportation, and bulk allocation of foodgrains. State governments are responsible for the identification of BPL families, issuance of ration cards, and supervision and monitoring of local distribution to consumers. Between one-fifth and one quarter of households purchase grains through the TPDS, though this share varies significantly across India. The share of TPDS grains in total household foodgrain consumption is substantial, about one-half, though again the state-level variation is high.

13. The performance of the TPDS has generally been very poor. The Government of India (2005) has characterized the TPDS as highly inefficient, with the cost of income transfer to the poor much higher than through other programs: for one rupee worth of income transfer to the poor, the government spends Rs 3.65. Implementation is plagued by large errors of exclusion, with only 57 percent of poor households covered. And leakage and diversion of benefits to the non-poor are also very high, with about 58 percent of the subsidized food grains issued from the central pool not reaching BPL families because of identification errors, non-transparent operation and unethical practices in the implementation of TPDS.11

14. The methodology currently being used to identify benefit recipients (which is based on proxy means testing) has several shortcomings: indicators are poorly chosen and not weighted, and there is no variation across the states. The Planning Commission is currently re-assessing the targeting methodology so as to improve the targeting efficiency of food subsidies as well as other social assistance programs.12

15. The government has been evaluating whether a smart card system for the major entitlement schemes could reduce leakages.13 The Planning Commission working group on the integrated smart card system has recommended that the government introduce such a system for the major entitlement programs. Such a system would allow income to be transferred directly to the poor, which many would consider optimal from a social welfare standpoint. Smart cards could be programmed with the identity of the card holder (photo and biometric fingerprint), and include information on socioeconomic characteristics, which determine the level of benefit. It could be transferred in lump sum, or used at the point of collection of the subsidized commodity. Smart cards have been used in many countries already as a means to reduce leakage in the delivery of social benefits (Box VII.2).

Fuel subsidies

16. Fuel subsidies are available on a universal (untargeted) basis, and vary by product. They are highest for kerosene, which is used most intensively by lower-income households and in late 2007 was being sold at about 40 percent of the market price. LPG, which is widely consumed by higher income households, was available at about half the market price, while other fuels (gasoline and diesel) have been subsidized to a much lower extent (about 10-20 percent).

17. The cost of fuel subsidies has risen sharply in recent years, reflecting the growing difference between administered and world oil prices.14 Including off-budget “oil bonds” issued to petroleum-sector companies in recent years to help offset significant losses resulting from price controls, oil subsidies amounted to 1.4 percent of GDP in 2006/07. Based on WEO forecasts for oil prices, fuel subsidies could average about 1.9 percent of GDP through 2012/13 if administered prices are not increased.

18. There appears to be ample room to cut back expenditure on fuel subsidies without unduly affecting poverty. The subsidy on kerosene, which is the only product consumed primarily by the poor, accounts for only one quarter of the total fuel subsidy bill. In 2006, the Rangarajan Committee on Pricing and Taxation of Petroleum Products had recommended restricting kerosene subsidies to BPL families, using a single retail price and passing subsidies through mechanisms such as debit cards.15 The Committee also recommended that the subsidy on LPG be eliminated gradually (since this fuel is mainly used by non-poor families), while for gasoline and diesel, subsidies should be eliminated altogether.

Fertilizer subsidy

19. Subsidized fertilizer (primarily urea) is available to farmers on a universal basis. The retail price of fertilizer is fixed and uniform throughout the country, with producers compensated for the difference between the retail price and the cost of fertilizer production. Expenditure on the fertilizer subsidy was about ½ percent of GDP in 2006/07, about a third of which went to producers.

20. In light of the rising cost of fertilizer subsidies, the government has on various occasions considered phasing them out. While the CMP called for subsidies to be targeted sharply at poor and marginal farmers, the government recently affirmed that the current subsidy framework will remain in place for at least another year. A proposal to introduce a smartcard system to distribute subsidies directly to farmers has been under discussion.16 The government is also considering an expansion of the list of fertilizers that are eligible for subsidy (though not of the subsidy bill) to include more complex products and encourage the use of a wider range of fertilizers considered more productive and environmentally friendly.

21. A reduction in fertilizer subsidies is advisable, not solely from a cost-savings perspective. As noted by Fan et al. (2007), to sustain long-term growth in agricultural production and achieve a sustainable reduction in rural poverty, the government should increase investment in agricultural R&D, rural infrastructure, and education, rather than focusing its financial support on fertilizer subsidies. Some have argued that reducing the fertilizer subsidy could reduce foodgrain production and hence compromise food security. However, if the elimination of the urea subsidy encourages farmers to employ a more favorable mix of fertilizer nutrients, it is possible that the increase in foodgrain production due to a better fertilizer mix could well be in excess of any reduction in foodgrain production because of an increase in urea prices.

Other Protective Programs

22. India has social (cash) pensions that aim to alleviate chronic poverty among specific social groups. Old age pensions have been available under the National Social Assistance Program (NSAP) to destitute individuals age 65 or older. In 2007, eligibility was extended to all BPL individuals over the age of 65, nearly doubling the total number of beneficiaries to 15.7 million elderly people.17 Nearly all states provide a similar social pension scheme for destitute widows and disabled people. There is also a national family benefits scheme that provides a lump sum benefit in the case of death of the primary breadwinner of a BPL family. Spending on all such programs is significantly less than on subsidies.

D. Preventive Measures

23. Preventive measures represent a relatively underdeveloped pillar of India’s social protection framework. As noted by Heller and Rao (2006), unemployment insurance does not exist, while in the health sector, a weak public health service has resulted in the bulk of health care being provided by the private sector. The various forms of formal retirement savings schemes cover only about 13 percent of the labor force. An important next step in the development of India’s social safety net will be to develop its social insurance programs.

Old Age Income Security18

24. India’s public pension system is very small, covering only 13 percent of the workforce. The public pension system has only been available to government employees and workers in the organized private sector (who account for only 6 percent of the employed population). This means that the vast majority of Indian workers have not had access to official old-age income security programs. Although pensions for the organized labor force in the private sector have been available since 1952, through the Employees’ Provident Fund and Employees’ Pension Scheme, the system is heavily undersubscribed, with only 40 million members.

25. A significant overhaul of India’s pension system is currently underway, which should greatly enhance the availability of old-age income security. On January 1, 2004, a New Pension System (NPS) was launched, which shifted all new central government employees to a defined contribution plan. In addition, the reforms outlined in the Pension Fund and Regulatory Development Authority Bill (2005) will allow the launch of personal pension accounts in India and make the NPS available to all workers in the unorganized private sector. It will also be available on a voluntary basis to any person governed by the organized sector schemes. By April 2007, about 500,000 members had joined the NPS, about twice the amount that had been expected for this period.19

26. The principal provisions of the new scheme are in line with best international practices. The employee contribution rate will be 10 percent, while the targeted terminal replacement rate will be 50 percent of the final wage. However, there are two important deviations from international best practices. First, the scheme does not provide a guaranteed minimum pension for participants. Second, participation is mandatory only for new central government employees and new employees of the 19 state governments that have joined the NPS.

Social Security and Health Insurance for Unorganized Workers

27. In 2007, the government launched two new schemes targeted at the unorganized sector. Aam Admi Bima Yojan will provide insurance to the head of rural landless households against natural death, as well as accidental death and disability. Rashtriya Swasthya Bima Yojana will provide health insurance to all BPL families in the unorganized sector, with full coverage to be achieved over the next five years.

E. PromotIonal Measures

28. India’s social protection framework includes a wide variety of promotional measures. The bulk of the expenditure has focused on livelihood support, though there are also interventions to promote certain outcomes. Workfare schemes in India date back to famine relief policies in the late 19th Century, and some have performed very well: for example, the Maharashtra Employment Guarantee Scheme introduced in the 1970s is often cited as a model safety net for a developing country.20 Other promotional measures include school stipends and mid-day school meals, child and maternal health programs, and self-employment programs for the rural poor.

Public Works

29. The National Rural Employment Guarantee Scheme (NREGS), launched in 2006, represents a major expansion in India’s spending on public works. Under the program, every rural household is guaranteed up to 100 days of unskilled manual wage employment per year, at the statutory minimum wage for agricultural workers in the state. If employment is not provided within 15 days, the applicant is entitled to unemployment allowance.21 The program aims to provide work on labor-intensive projects focusing on rural infrastructure. A key feature is that the program is to be implemented through local governments, unlike earlier programs that were implemented by the central or state governments.

30. The new program, which is still in early stages, has received mixed reviews so far. According to official reports, it has done well in meeting demand for employment: nearly all of the 21.2 million households that applied in 2006/07 received work (averaging 41.2 days), and women (whose participation is to be encouraged under the program) accounted for about 40 percent of the hours worked.22 However, concerns about corruption have been raised. A recent study by the Centre for Environment and Food Security estimated that about 75 percent of the money spent on the job guarantee program in the eastern Indian state of Orissa never reached the intended beneficiaries.23 Also, implementation has been found to be highly variable across (and even within) states.

31. In principle, the NREGS could make a significant contribution to reducing rural unemployment and poverty. Research suggests that the lean season rural poverty rate could be reduced by 10-15 percentage points, with poorer households benefiting more than others.24 However, India’s experience with public works programs raises questions about whether such a program is the most effective way to address rural unemployment. As noted in Ajwad (2007), there have been implementation problems such as misuse of program funds, ghost workers, and underpayment of wages. In addition, the cost of the program—set to rise from 0.2 percent of GDP in 2006/07, to as much as 1½–2 percent of GDP once the program has been rolled out nationally in 2008/09—raises concerns about its implications for fiscal consolidation.

32. There are also more fundamental concerns about the effectiveness of this spending. First, as with most workfare programs, it is unclear how large the economic return from the projects undertaken (which are supposed to focus on roads and agricultural infrastructure) will be. Second, implementing such a large program entails significant administrative burdens, and demands a level of efficiency and accountability that previous programs have largely failed to achieve. Close monitoring and evaluation will be critical to ensure the program’s success.

Other Promotional Programs

33. while there are other programs that aim to promote movement out of poverty, historically they have played a small role in the overall social protection framework. These include programs to promote school enrolment, attendance, and retention; the Integrated Child Development Services Scheme (ICDS), which aims to improve the health and general welfare of women and young children; and the Swarnajayanti Gram Swarozgar Yojana (SGSY), an integrated microenterprise development program for the rural poor.

34. Programs to promote school attendance have taken on increased importance. Despite expenditure on primary school education that is not out of line with that of other countries, the level of literacy amongst young people was markedly lower in other rapidly growing emerging economies in 2000.25 One of the key problems has been to ensure that school attendance remains as high as enrolment. To tackle this, a number of programs have been introduced to draw in pupils from poorer backgrounds, for example the national mid-day meal scheme in primary and secondary schools.26 There are some indications that the program has increased school attendance, especially that of girls, and improved child nutrition.

35. The success of the mid-day meals program highlights the important role that conditional cash transfer (CCT) programs can play in providing income support and promoting the socioeconomic development of the poor. CCTs are a relatively new type of social assistance program that represent an innovative approach to the delivery of social services (Box VII.3).27 They provide money to poor families conditional upon investments in human capital, usually sending children to school and/or bringing them to health centers on a regular basis.

F. Conclusions

36. By improving the efficiency and allocation of its spending on social protection programs, India could likely achieve significantly better social outcomes. Improving the subsidy framework is key in this regard, given how many people rely on this program, and also its importance in budgetary terms. As noted by the Government of India, the main objective of reform of the subsidy regime is to make subsidies explicit, transparent, and work for the poor and the needy. Reform can unleash a virtuous cycle of enhancing the consumption of specific essential items by the poor, reorient public expenditure for investment and infrastructure, and raise the growth of income and employment.28 Reforms that improve the targeting of subsidies and strengthen delivery mechanisms could go a long way towards enhancing their efficiency and lowering their cost. In this connection, monitoring and evaluation of social protection programs needs to be stepped up considerably, to provide policymakers with the information needed to assess program effectiveness.29

37. There is also a need for a significant policy reorientation of the Indian safety net towards social protection programs, in order to meet the changing and increasingly diverse needs of the population. There should be an increased emphasis on preventive programs which help the poor, and those vulnerable to poverty, to manage risks and shocks better. This would entail expanding programs such as old age income security as well as the quality of public health care. Consolidation of the vast array of social protection programs would also likely bring benefits, given that the large number of schemes under the social safety net contributes to governance problems.

Box VII.1.Social Safety Net Objectives of the Government of India 1/

  • Food and nutrition security: Improve targeting and reduce inefficiencies of the food subsidy program. Provide a cooked nutritious mid-day meal in all primary and secondary schools.

  • Employment: Enact a National Employment Guarantee program, under which at least 100 days of employment at the minimum wage will be guaranteed to all poor and lower middle-class households.

  • Education: Double spending to 6 percent of GDP. Universalize primary education. Expand use of school stipends and meals to increase school attendance.

  • Health: Triple spending to 3 percent of GDP. Universalize coverage under the Integrated Child Development Services, which provides healthcare and nutrition for children up to 6 years of age and pregnant and lactating women.

1/ These objectives were set out in the National Common Minimum Programme (May 2004) and the Approach Paper to the 11th Plan (December 2006).

Box VII.2.Smartcards: An Innovative Way to Deliver Social Assistance1/

Smartcards provide an innovative mechanism for improving the delivery of cash transfers. When used for social transfers, each beneficiary is issued with a smartcard that contains information (encrypted on an integrated circuit) on their entitlement to a grant. The smartcard may also contain additional identification data such as biometric fingerprinting. Such systems convey three major benefits compared to traditional social transfer mechanisms (whether in cash or in kind): (i) high security, because of biometric identification; (ii) great flexibility, because beneficiaries can withdraw money when and where they desire; and (iii) increased safety compared to conventional cash delivery. Another advantage is that the government can vary benefit amounts remotely; for example, following a natural disaster, smartcards provide a mechanism for rapid and efficient delivery of additional assistance to those affected.

A wide range of countries are using smartcards for social transfers. In South Africa, Namibia, and Botswana, social pensions are already being paid through smartcards. Each month, the pension is transferred electronically to the card account, and the beneficiary can access the funds either through conventional banks, mobile ATMs, or through simple point-of-sale terminals in retail shops. In Iran, smartcards were adopted in 2007 to provide fuel subsidies. In Russia, the Moscow Social Card distributes pensions and other social benefits, gives access to medical insurance and treatment, and qualifies the beneficiary for retail discounts.

Smartcards are also in use in parts of India. One of the earliest applications was for driver’s licenses and vehicle registration certificates, initiated in Gujarat and Madhya Pradesh. In the social transfer realm, smartcards (or similar technology) are being used in the provision of microfinance in Andhra Pradesh, electricity in Sundarbans, and food subsidies in Andra Pradesh. In 2002, Kerala became the first Indian state to pilot the use of smart cards for food and other commodity subsidies. The Planning Commission has recommended adoption of smart card technology for the national distribution of such subsidies, as well as other welfare benefits.2/

1/See “Delivering Social Transfers,” Regional Hunger and Vulnerability Program, www.wahenga.net.2/Planning Commission (2007).

Box VII.3.Conditional Cash Transfers

Conditional cash transfers (CCTs) are a relatively recent innovation in the provision of social assistance which is proving effective in reaching the poorest and most vulnerable. The goal of these programs is to both reduce poverty in the short term—by providing income transfers—and reduce poverty in the long term, by making transfers conditional on the poor’s investment in their health and education. In the family context, CCTs make cash donations contingent upon verifiable commitments from parents, such as making sure their children receive immunizations and regularly attend school.

Progresa (now called Oportunidades), one of the earliest of such programs, was launched in Mexico in 1997. 1/ The programs’s objectives are threefold: (i) provision of income support to families in extreme poverty; (ii) attainment of higher levels of education, health, and nutrition; and (iii) linking beneficiaries up with new development services and programs that help them improve their quality of life. Health and education grants are offered to families on condition that their children under age six visit health facilities regularly, and those 6–17 remain in school, attending regularly. The program replaced general food subsidies, and is financed by the federal government at a cost of about 0.4 percent of GDP in 2007. The program has grown from an initial 300,000 families to about 5 million in 2007. With an operating cost amounting to less than 6 percent of benefits, Oportunidades is viewed as one of the world’s most efficient social programs.

The success of Oportunidades spurred the introduction of CCTs in other countries, including Brazil’s Bolsa Família Program (BFP), now the world’s largest CCT with about 46 million individuals. 2/ The targeting accuracy of the BFP is considered particularly impressive. This has been achieved through geographic means-testing under the unified family registry, with 73 percent of transfers going to the poorest quintile and 94 percent going to the two poorest quintiles. These results put the BFP amongst the best-targeted transfer programs in the world. Thanks in part to successful targeting of benefits, the program has demonstrated a significant impact on poverty and inequality. The BFP is estimated to have accounted for nearly a quarter of Brazil’s recent (and impressive) reduction in inequality and 16 percent of the fall in extreme poverty.

As the BFP shows, CCTs can play an important role in unifying social policy. The BFP has linked up to complementary services and programs at the federal level. It has also been integrated with sub-national CCTs. In this way, it has made social policy more coherent and is facilitating the creation of an effective social safety net. And thanks to the use of innovative performance-based management mechanisms that reward quality implementation, the BFP has been able to succeed in a decentralized context.

Ongoing CCT reform issues include how to promote the “graduation” agenda, to help poor families escape from poverty and reduce their reliance on income transfers. In the case of the BFP, as noted by Lindert et al. (2007), the program could expand incentives for the accumulation of human capital. Some particularly promising and likely feasible options include: (i) raising the upper age for school attendance requirements; (ii) introducing higher benefits for older children (whose shadow wage is higher); and (iii) introducing bonuses for grade completion and school cycle graduation. Another lever is to enhance links of BFP beneficiaries to complementary services, such as social assistance and job-related services.

CCTs have even been adopted in industrialized countries. In September 2007, New York City launched Opportunity NYC, the first CCT in the U.S. The program provides education incentives to promote superior attendance and good behavior in school, achievement and improved performance, and parental engagement in children’s education. Health incentives are offered to maintain adequate health coverage, while employment and training incentives will promote increased employment and earnings or combine work activities with specific job training activities. Families will earn from $50–$300 for completing a conditioned activity or meeting a specified target, providing additional income of $3000–$5000 per year.

1/Government of Mexico (2007).2/Lindert, et al. (2007).

Figure VII.2.India: Principal Subsidies 1/

(In percent of GDP)

Sources: Indian authorities; and IMF, staff estimates.

1/ Includes off-budget issuance of subsidy-related bonds by the central government.

Table VII.1.India: Poverty Headcount Ratio 1/(In percent)
RuralUrbanAll India
1973/7456.449.054.9
1983/8445.740.844.5
1993/9437.332.436.0
2004/05 1/28.325.727.5
Source: Planning Commission (Government of India).

Based on uniform recall period data.

Source: Planning Commission (Government of India).

Based on uniform recall period data.

Table VII.2.Safety Net Expenditures(In percent of GDP, average for 1972-1997)
Social Security and WelfareTransfers to Organizations and Households
Latin America and the Caribbean2.93.3
Sub-Saharan Africa1.41.5
North America11.212.1
Western Europe13.614.8
South Asia 1/1.52.7
Middle East and North Africa4.76.7
East and Central Europe10.311.7
East Asia and Pacific2.42.3
World average5.57.0
Source: Besley et al. (2003), Table VII.1.

Excludes India.

Source: Besley et al. (2003), Table VII.1.

Excludes India.

Table VII.3.India: Selected Core Social Development Programs(2007/08 budget allocations)
(In billions of rupees)(In percent of GDP)
Income support
Rural employment (primarily NREG)1330.3
Rural housing subsidies (Indira Awaas Yojana)400.1
Subsidies (primarily food, fuel, and fertilizer) 1/1,2892.7
Welfare schemes for Scheduled Tribes / Scheduled Castes330.1
Health
Integrated Child Development Services480.1
National Rural Health Mission990.2
Education
Mid-Day Meal Scheme730.2
Universilization of Elementary Education (Sarva Shiksha Abhiyan)1070.3
Total1,8223.9
Source: Government of India 2007/08 Budget.

Includes staff projections of off-budget subsidy-related bond issuance by the central government.

Source: Government of India 2007/08 Budget.

Includes staff projections of off-budget subsidy-related bond issuance by the central government.

References

Prepared by Andrea Richter Hume.

Speech given at the Institute of Economic Growth (New Delhi - December 15, 2007).

The estimate for subsidies includes off-budget bonds issued to compensate the Food Corporation of India and oil producing companies for losses incurred from the provision of goods at administered prices.

The term “social protection” includes (i) policies generally considered part of a “social safety net,” i.e., that protect people when they fall into poverty, and (ii) policies that provide “social insurance,” e.g., old age income support and disability insurance.

This follows a widely used categorization of social protection measures in India, e.g. Dev et al. (2007).

The goods and services under reference are those categorized as social services (education and health) and economic services (e.g., in the spheres of agriculture, energy, and industry).

Government of India (2004), p. 4. Data limitations preclude the calculation of more recent estimates of implicit subsidies.

A 1997 discussion paper of the Government of India critiqued the subsidy regime as unduly large, non-transparent, largely input-based and poorly targeted, generally regressive, and inducing waste and misallocation of resources (Srivastava et al. (2003), p. 1).

India has a long history of food subsidies, which were first provided in 1939 in the context of food shortages. See Planning Commission (2005 and 2007) for a detailed analysis of India’s food subsidy program, including reform ideas.

The distribution of BPL cards has been problematic: only 41 percent of the poorest rural households and 29 percent of the poorest urban households held BPL cards, indicating that a fair process has not been followed their distribution.

Castañeda, et al. (2005) evaluates targeting methodologies in five Latin American countries and the U.S.

A system of quasiautomatic fuel price adjustments had been introduced in early 2002, but was suspended in late 2003 when global oil prices began to rise. Since then, prices have been adjusted only partially. See “Dealing with Higher Oil Prices in India,” E. Fernandez, India—Selected Issues (IMF Country Report No. 06/56).

A cautious approach is needed when reducing kerosene subsidies, given kerosene’s importance in rural areas as a lighting source, in the absence of reliable electricity (Gangopadhyay et al. (2005), p. 2335).

Four states had volunteered to be part of a pilot study on using smart cards to deliver fertilizer subsidies, but subsequently all backed out, reportedly due to political opposition to the reform.

Spending on social pensions under the new eligibility and monthly pension standards would amount to less than 0.1 percent of GDP per annum.

This section draws on Poirson (2007).

Financial Express (April 10, 2007).

The fact that work is guaranteed gives the program a significant social insurance element.

Ministry of Rural Development (Government of India)—http://nrega.nic.in/.

Rai (2007). A follow-up study by the Government of India found some irregularities, but questioned the allegation of significant misappropriation of funds.

OECD (2007), pp. 63–64.

The program was introduced following a lawsuit that challenged the government to use its vast stores of rice and wheat to alleviate hunger. In response, the Supreme Court ordered the government to provide cooked lunches in all of the country’s schools.

The Planning Commission is developing an integrated accounting system to monitor the progress of its flagship programs. A step in that direction is the planned monthly web-publication (by the Comptroller General of Accounts) of expenditure data on 27 central schemes entailing an annual cost of about 2 percent of GDP. (Hindu Business Line, September 13, 2007).

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