In 1925, Motilal Nehru asked the chief of the Indian army: “What do you mean by Indianising the Indian army? The army is ours. What we want is to get rid of the Europeans in the Indian army.” Current labour laws that require employers to confiscate 45 per cent of the salary of employees whose wages are under Rs 1.8 lakh per annum and hand it over to various programmes and agencies like the Employees’ Provident Fund Organisation (EPFO), Employees’ Pension Scheme, Employees’ Deposit-Linked Insurance Scheme, Employees’ State Insurance Corporation deserve exactly the same quip. The money does not belong to these organisations or schemes and only a fool would argue that a person’s salary is not actually his property to dispose of as he chooses.
More importantly, and painfully, government data is clear that employees with wages this low do not have any savings. It is impossible, or at least very difficult, for them to live on half their salary. The next round of labour law reform must fix this injustice and give employees three choices in how they would like to receive their salary.
But first, let’s step back a bit. Labour law reforms are crucial for making India a fertile habitat for job creation and manufacturing. People who say they don’t matter have obviously never studied the effect of the Hartz committee labour reforms on the transition of Germany from being the sick man of Europe to the manufacturing dynamo that it is today. Recent ministry of labour announcements demonstrated courage and understanding that fixing the plumbing makes life easier for entrepreneurs. But the objective of the next round of labour reform should be to increase formal employment. India’s low productivity is rooted in painful transmission losses — our 6.3 crore enterprises only translate into 7,500 companies with paid-up capital of more than Rs 10 crore.
Informal employment is not entirely a result of our difficult hire-and-fire regime alone. It is largely because the move to a cost-to-company salary model, under which benefits are not over and above salary but reduce the amount that one takes home, is not attractive. The migration of youngsters from rural areas to India’s six biggest cities is already slowing down to a trickle because of the massive divergence between real wages (what employees care about) and nominal wages (what employers care about). But this painful real-nominal divergence is amplified further by the divergence between what employees call chitthi-waali salary (gross pay) and haath-waali salary (net take-home pay).
The huge difference between gross and net salary — part of the difference is funnelled into schemes that offer poor value for money, bad service and are humiliating — breeds informal employment. In the case of informal jobs, gross salary is equal to net salary. Notwithstanding the recent laudable attempts to create portability, the EPFO and the Employees’ State Insurance Corporation are fundamentally goofy monopolies. There are 55 million dormant accounts, more than half the total number of accounts, in the EPFO. Hard-earned money is abandoned by employees because they are frustrated with the organisation’s incompetence, corruption and inefficiency. Additionally, the EPFO’s charge of 440 basis points makes it the world’s most expensive government securities mutual fund — other mutual funds charge 25 basis points for gilt funds. The Employees’ State Insurance Corporation has India’s worst health insurance claims ratio — it only pays 49 per cent of contributions as benefits — and offers rotten care, while sitting on Rs 28,000 crore of idle financial investments. The revitalised ministry of labour should continue to defer any amendments concerning the controversial hire-and-fire issue and the next round of high-impact labour reform should focus on giving employees three choices in how their salary is paid.
The first choice should be whether to pay the 12 per cent employee contribution to the EPFO. This is an unaffordable salary deferment for low-wage employees who cannot live on 45 per cent of their gross salary. Employees should have three options: to opt out of this contribution when joining; to pay it into their individual National Pension Scheme accounts, as is the case for new civil servants; or to continue paying it to the EPFO.
The second choice that employees must have is whether to pay the 12 per cent employer contribution to the Employees’ Pension Scheme or to the National Pension Scheme. The Employees’ Pension Scheme is bankrupt — a deficit of Rs 50,000 crore is being balanced by brutally and slyly reducing benefits. Employees must be allowed to choose between it and diverting their employer contribution to the EPFO as payment towards their National Pension Scheme individual accounts.
As their third choice, employees should be given the option to pay their monthly health insurance premium to the Employees’ State Insurance Corporation or to purchase a plan from any Insurance Regulatory and Development Authority-regulated health insurance company. The insurance industry would gladly create the information technology infrastructure to ensure that these policies are seamlessly portable when an employee moves from one company to another.
The rationale for the huge difference between gross wages and take-home salary was to encourage long-term savings and to “protect” employees from themselves or, rather, from their “myopia”. This is not just patronising, it is impossible because the payroll confiscation rate cannot be higher than the savings rate. A revamp of our benefits regime is also overdue because of a shift in the nature of employment contracts from lifetime mai-baap relationships to short taxicab transactions that need backpack benefits which are easily portable with job changes. This reform will also act as fuel for our ambitious skills agenda because, as the work of Nobel laureate Gary Becker suggests, individual investments in human capital are closely linked to take-home pay. The EPFO and the Employees’ State Insurance Corporation do not have clients but hostages because of labour laws that currently protect their monopolies. India’s job emergency desperately needs the ministry of labour to end this.
The writer is chairman, Teamlease Services