1. Column: Chitthiwaali vs haathwaali salary

Column: Chitthiwaali vs haathwaali salary

The huge gap between gross and net salary that is murdering formal employment needs three employee choices.

By: | Updated: February 20, 2016 1:28 AM

Most kids at our job fairs respond to the salary offered with the question “Haathwaali ya Chitthiwaali salary?” The narrative that the huge gap between gross and net salary is toxic is hardly unfounded or unfair; the 45%+ mandatory salary deduction for low wage employees is not only too high but it goes to poor value-for-money programmes like the Employee’s Provident Fund Organization (EPFO is the world’s most expensive government securities mutual fund) and Employee State Insurance Corporation (ESIC is India’s worst health insurance programme with a claims ratio of 45%). The alphabet soup of mandatory deductions that create the huge gap between gross and net salary (EPFO, EPS, ESI, EDFLI, LWF, bonus, gratuity, etc.) originated in noble intentions but have become toxic in a cost-to-company world where there is only one pocket to park employee costs and all benefits are monetised. A review of India’s mandatory benefits regime will not only increase formal employment but give employees control over their money.

Our demographic dividend—10 lakh kids joining the labour force every month for the next 20 years —does not mean people but productive people. India’s youth need formal jobs and are becoming a formidable political force; there were 100 million new voters in the last national election and there will be 100 million new ones in the next one. Children born after liberalisation in 1991 (reform babies) not only think very differently than people who experienced the post-Independence years (midnight’s children) but they face a considerably different labour market than their parents; employment has shifted from being a lifetime contract to a taxicab relationship and companies don’t last forever (the life expectancy of a Fortune 500 company has come down from 65 in 1935 to 15 now). Organisation men, who gave loyalty for job security and defined benefit pension plans, are being replaced but with what is still emerging.

A young country like India—the average age of our population in 2020 will only be 29—needs to think boldly about breaking the low level equilibrium of our current employment regime; 100% of net job creation in the last 25 years has happened in low productivity informal jobs and despite have 63 million enterprises, we only have 16,000 companies with a paid-up capital of more than Rs 10 crore. It is easy but unfair to equate social security with employee benefits; salary belongs to individuals and high levels of mandatory confiscation blunt freedom and create inefficient monopolies. We suggest three changes:

Individual choice of service provider: EPFO and ESI have become inefficient monopolies that do not have clients but hostages. They are high cost, inefficient and technologically challenged. The last budget made an important announcement that needs implementation; individuals should be allowed to choose whether they pay their Provident Fund Contributions into EPFO or NPS (National Pension System) and whether they pay their health insurance contributions to ESI or health insurance providers. Public policy experience suggests that competition is a more important effective lever for change than private versus public ownership (airlines, mutual funds, telecom, etc.) and EPFO and ESI should continue to exist but must be forced to compete for their customers.

Individual choice around employee contribution: EPFO requires a mandatory 12% contribution from both employees and employers. In a cost-to-company world, this mandatory contribution does not increase gross salary but comes out of it and therefore reduces net salary. There is nothing wrong with mandatory savings but setting them at a level much higher than the savings rate for that level of income is irrationality that breeds informal employment. Giving individuals a choice around their employee contribution of 12% would allow them to reduce the gap between gross and net salary or allow them to divert these savings to other vehicles. This choice by employees would not impact the mandatory 12% contribution by employers.

Individual choice around employee pension scheme: About 60% of the employer contribution to the Provident Fund is currently diverted to a defined benefit program called the Employee Pension Scheme (EPS). EPS not only has a birth defect—both benefits and contributions are defined—but most employees would have been better off if this money had been invested in a bank deposit, life insurance scheme, or just continued in the defined contribution account of EPFO. The poor design also creates hidden financial liabilities; despite the continuous reduction of benefits by EPFO, the gap between asset and liabilities is in excess of R20,000 crore. The continuous reduction of benefits stands contrary to the undertaking given to the Supreme Court in the early 1990s that this schemes was sustainable and beneficial. Giving employee’s choice to continue with EPS or divert this contribution to their defined contribution account would expose the lie that most employee’s prefer EPS.

India is just coming out of a failed experiment that tried to use a large, coercive and fiscally irresponsible state to reduce poverty. But poverty is about productivity and improving our productivity needs complementing our reforms to human capital (school education, skills, and college) with labour law reform. Most debates equate labour laws with hire-and-fire (the infamous Chapter VB of the Industrial Disputes Act) but these three changes to our salary regime are a high impact place to start.


The writers are with Teamlease Services

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  1. S
    Feb 20, 2016 at 11:43 am
    Teamlease is brazenly trying to mislead the people. So far EPF is concerned this article is nothing but a distorted and baseless representation of something which is totally contradictory to the provisions of the EPF Act 1952. I do suggest the reader to carry out a fact finding of the simple provision that 12% EPF contribution is not on the gross ry but on the basic and DA which is normally 50 to 60 percent of the gross ry. The write up of Teamlease is an exaggeration with vested interest. It is also clarified that any young employee with starting pay (basic plus DA) of Rs.15000.00 above are not mandatory to join the EPF. Then is it not a concocted story to claim that the new and youthful workforce of the country are forced to join the Hostage Taking EPF Scheme and only because such madatory provision of labour law they have been reluctant to join the formal sector. Hence, I can safely conclude that this is aimed at tarnishing the image and the noble object of the EPF Act 1952. EPFO should definirely think to file a misleading defamation case against the author of this article and also the publisher.
    1. S
      Feb 20, 2016 at 5:04 pm
      The author is thoroughly confused and illeterate about the provisons of the EPF Act 1952. If it is not so, he should not have written such a meaningless and misleading article at all. Or he is bent to defame the image of EPFO. One simple example is related to his tabulated presentation about EPF contribution share of an employee drawing gross ry of Rs.5500.00 per month. Mind you, as per section 6 of the said Act 1952 it is 12% of the basic pay plus DA but not gross ry/ wage. In India, if a worker is drawing gross ry of say Rs.5500.00 his EPF liable wage may be 50 to 60% of the gross i.e., around 12% of Rs.2500.00 to Rs.3000.00. which comes to Rs.300.00 to 360.00 per month but not Rs.660.00. Another fundamental error of the learned author's contention, which is one of the basic foundations of the instant article , is that our younger kids joining the workforce of the economy are hesitant to join the formal and organised sector only because of their law mandated EPF contributory liability of 12% of gross ry. For kind information of the author it is once again clarified that EPF contribution is only on Basic plus DA but not on gross ry. Such an illinformed proclamation/ proposition is really hard to digest by a man of common sense. For enlightening the readers of this article, not the learned and motivated author, I am compelled to place the factual position of EPF prior to after 1st September 2014. Prior to this date only an employee drawing Rs. 6500.00 as initial basic plus DA per month is to contribute to EPF mandatorily.That is also only upto that ceiling but not beyond that though voluntary options are available. This mandatory pay ceiling has been raised to Rs.15000.00 due to the long pending demand of various national and rehional level trade unions.Those employees whose initial pay(basic DA) is above Rs.6500.00 which is now Rs.15000.00 need not join the EPF though they can join voluntarily. Given this provisions of the Act 1952, how can one rational person even think of such a falacious proposition as projected by the learned author of the Teamlease to be the root cause of our young workforce have been dischanted/ dissuaded from joining the formal sector. If the claim is true than it may also be true that in the formal sector our fellow workers or employees were paid less than Rs.6500.00 basic plus DA per month and now less than Rs.15000.00 per month. Then, any Tom and Hary can see the real reason for not willing to join in the formal sector, which is not due to mandatory EPF contribution but due to low wage. If employes are paid such a low wage then how can the author contend further for high CTC etc. citing so and so EPF ,ESI liability ? Let us ume that employees are free to opt out of EPF contribution then in what way it is going to help the employer to reduce CTC? Is he planning to reduce the wages of the employees? The employer has to bear his share of social and economic cost of funding Social Security protection of the poor working cl whether it us EPF or NPS or any altrnative arrangement. Coming to the point again, if the employee is offered a job in the formal sector now with a basic plus DA pay package of Rs.15001.00 i.e., one rupees above Rs.15000.00 then he is no longer under the compulsory coverage of EPF. He is free to manage his future social security requirement. Just offer him such opportunity and check out if he joins in the formal sector or not. The learned author would agree that on this day Rs.15001.00 is nothing. If you are not willing to pay this much then don't blame EPF or ESI for young kids not joining formal sectors etc. It is nothing but nonsense and diabolical design to tarnish the noble object of the social security legislations. Yes , there is should be options made available to the employees but before that there should be level playing field with fair rules of the game for the competing insutions and which can be easily understood by the beneficiaries and cannot be distorted by the employers to their advantage. EPFO is advised to seriously deliberate to see the possibility of filing defamation case against those responsible for such unwarranted and distorted writeups.
      1. Jai Singh
        Feb 23, 2016 at 3:31 pm
        The information and even the data is not based on correct presumptions. I understand the inefficiency of EPFO and ESIC, but both of them are very good acts. Ehy to dilute them and cause loss, its better to clean them and implement them effectively.
        1. K
          Feb 20, 2016 at 12:03 pm
          Article is based on wrong facts; Writer simply wants to promote earn & burn philosophy which would play havoc with generations

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