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Explained: What does ESI rate cut mean?

Government says reduced contribution rates will bring relief to workers, encourage more to join formal sector, besides making establishments more viable. Unions say employers benefit more, deal was for smaller cut.

Explained: What does ESI rate cut mean? ESIC Hospital in Mandi. Across the country, 154 such hospitals are being run by the ESIC and the respective state governments. (Express Archive)

Last week, the government reduced the rate of contribution for medical care under the ESI (Employees’ State Insurance) Act to 4% from 6.5%. The reduced rates will come into effect from July 1. The first revision in ESI rates since 1997, however, has faced criticism from Left-backed trade unions.

How does ESI work?

An autonomous body, ESI Corporation, regulates medical services being provided by the ESI Scheme in the respective states and Union Territories. Funded by contributions made by the employers and the employees, ESI provides for direct cash compensation for sickness, disablement maternity, death, occupational disease or death due to employment injury etc to organised sector employees and their dependents. The ESI Act applies to premises where 10 or more persons are employed. Employees with wages up to Rs 21,000 a month (earlier Rs 15,000 per month) are entitled to the health insurance cover and other benefits under the ESI Act.

READ | First in 22 years, Employees’ State Insurance contribution slashed to 4% from 6.5%

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How wide is its coverage?

As part of its second-generation reforms ESIC-2.0, the ESI Corporation decided to implement the ESI scheme all over the country. Accordingly, the ESI Scheme is now being fully implemented in 346 districts and 95 district headquarters areas, and partially in 85 districts.

There are 154 ESI hospitals in the country that are being run by ESIC and by the respective state governments.

As part of efforts to expand social security coverage to more people, the government had carried out a special programme to register employers and employees between December 2016 and June 2017, along with extending the coverage of the ESI Scheme to all districts of the country in a phased manner. The efforts resulted in a rise in the number of registered employees (insured persons) and employers. While the number of insured persons increased to 3.6 crore in 2018-19 from 3.1 crore in 2016-17, the total contribution jumped to Rs 22,279 crore in 2018-19 from Rs 13,662 crore in 2016-17.

What does the revision seek to achieve?

The revised contribution of 4% comprises the employers’ contribution of 3.25% of the employees’ wages (reduced from 4.75%), and the employees’ contribution of 0.75% (reduced from 1.75%). The reduction of ESI rates is, as per government estimates, expected to benefit around 3.6 crore employees and 12.85 lakh employers. The government said the reduced rate of contribution will bring about “substantial relief to workers and it will facilitate further enrolment of workers under the ESI scheme and bring more and more workforce into the formal sector”.


Also, reduction in the share of employers’ contribution will “reduce the financial liability of the establishments leading to improved viability of these establishments”. “This shall also lead to enhanced Ease of Doing Business. It is also expected that reduction in the rate of ESI contribution shall lead to improved compliance of law,” the government said in a statement.

Why are some trade unions criticising the revision of rates?

Trade unions such as the Centre of Indian Trade Unions (CITU) have described it is a unilateral decision and not in line with a decision taken by the Tripartite Governing Council of the ESI.


The All India Trade Union Congress (AITUC) too has issued a statement, saying that instead of reducing the rate of contribution, more benefits should be planned under the health insurance scheme and a practice of inspections should be restored to ensure compliance.

CITU said it is a gross violation of the 175th Tripartite Governing Body meeting of the ESI held on September 18, 2018, where it was unanimously decided that the employers’ contribution to ESI would be reduced to 4% of enrolled workers’ wages from 4.75%, and the employees’ contribution to 1% from 1.75%. This would have brought the total ESI contribution to 5% annually, instead of 4% as announced. Subsequent to that meeting, a draft notification intending to reduce the contribution to 5% had been issued by the government on February 15, 2019 (as per a government release dated February 22, 2019).

CITU said that the eduction in ESI contribution is mainly to benefit the employers/business class. It added that the employers’ obligation being reduced by 1.5% and that of workers by only 1% “would lead to huge benefits/savings of the employers to the tune of estimated Rs 8,000-Rs 10,000 crore.” CITU also claimed that the increase in enrolment in ESI as stated by the government is due to upward revision of entitlement level from Rs 15,000 to Rs 21,000 from January 1, 2017, as decided by the Tripartite Governing Body.

Has the scheme faced criticism earlier?

Questions have been raised earlier about inefficient spending of contributions. Disparities in money collected from employees and employers and the amount spent on their medical benefits had come under the scanner of the Standing Committee on Labour.

In its report from February 2019, the standing committee has asked for a detailed explanation on the mismatch between the total expenditure of Rs 6,409 crore for 2016-17, out of collected contributions totalling Rs 16,852 crore.

First published on: 20-06-2019 at 12:59:24 am
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