How Social Security Could Boost India’s Economy

This weekend, India’s Prime Minister Narendra Modi launched three social security schemes aimed at helping the people of West Bengal gain access to pensions and insurance. Earlier, Modi also launched a program to provide every Indian citizen with a bank account in a bid to promote financial management, especially amongst the poor, and to modernize payment methods for workers.

Social security, though not novel, is still an underdeveloped concept for a country where at least 30% of the population continues to live in poverty and where old age is often accompanied by extreme destitution for many. The current program covers only a small portion of the population and is primarily employer driven, limiting its scope to help the vast majority of people.

While Modi’s plans to create a bigger safety net for more citizens are still in their infancy, they could be a harbinger of an important change for the Indian workforce, one that can enhance the skill level of labor, enable entrepreneurship, increase consumption, and propel Indian commerce to new heights.

The concept, of course, has a successful precedent in the U.S. When President Franklin Roosevelt created social security in 1935, his landmark action arguably changed the course of American history by freeing Americans to aim for higher education, innovate, and take entrepreneurial risk instead of worrying about their welfare when they grew old. That spirit of risk-taking has been instrumental in creating America’s technology boom and boosting its economic power over the decades.

The same could happen in India if Modi succeeds in widening the scope of the nation’s social security program. It might even be crucial.

One of the highest areas of growth for the Indian economy has been its Information Technology sector, which accounts for 7% of GDP, grew at a compound annual growth rate of 25% from 2000-2013, and is creating new jobs at a rapid clip. But the industry may be slowing down, driven by international competition from companies such as Google and Microsoft, due to a lack of innovation, according to forecasts by Indian trade association IBEF and Livemint, a sister publication of the Hindustan Times.

While half of India’s population is under 21, creating a fertile labor pool for the future, a large rural population (68%) and poverty could hold the country back in being able to realize its potential unless its people are freed from a hand-to-mouth existence. For example, a lack of options and financial necessity still keep almost 50% of workers stuck in the agricultural sector, most of whom have no social security whatsoever, while what is needed is a shift of the workforce towards more skilled jobs, such as in IT or the equally emergent and large healthcare sector. A robust social safety net could well give such people the courage to migrate towards urban areas and pursue higher education and knowledge-based jobs.

In addition, social security will add to the Indian economy through increased consumption, which is important in a nation where the per capita income is only about $1,500, according to the World Bank. Once again, there is a striking parallel to justify this assumption. According to a report by the AARP, social security adds about $1 trillion to the U.S. economy every year, mainly through consumption.

Much of the attention surrounding Modi’s economic plans has focused on the Indian government’s opening up of its markets to foreign investment and lowering barriers to trade, but more subtle initiatives like social security will also play an important role in helping the Indian economy become the powerhouse that the Modi administration has promised it can be, and which the international investment community is hoping for.

Kumar has worked at leading U.S. investment banks in technology, media, and telecom mergers and acquisitions, He has also served as a strategic consultant to media companies and hedge funds. He has an MBA from Columbia Business School and has lived in India.