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  1. Budget 2018: Fixing the original breeder of informal employment

Budget 2018: Fixing the original breeder of informal employment

Budget 2018: The Health Insurance scheme is important because it offers a rational counter to the irresponsible demand for universal basic income, provides a solution to one of the biggest reasons people fall back into poverty, and could potentially unleash consumption because social security needs free up excess savings.

By: | Published: February 2, 2018 6:07 AM
Budget 2018: At a recent job fair when we offered a 21 year old a salary of R20,000, she turned around and asked “Haath Waali ya Chitthi waali salary?” Budget 2018: At a recent job fair when we offered a 21 year old a salary of R20,000, she turned around and asked “Haath Waali ya Chitthi waali salary?”

Budget 2018: At a recent job fair when we offered a 21 year old a salary of R20,000, she turned around and asked “Haath Waali ya Chitthi waali salary?” The massive difference between gross salary and net salary for mandatory payroll confiscation schemes like Provident Fund, Employee Pension Scheme, Health Insurance from ESI, etc were too high for people at low wages (most of these schemes don’t apply when you cross Rs 25,000 per month and that makes these deductions curiously regressive). The budget had many things for formal employers and formal employees. But the three with most long-term impact for formal low-wage employment are the National Health Insurance Scheme, tweaks to Employer and Employee contribution to Provident Fund, and fixed term employment.

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The Health Insurance scheme is important because it offers a rational counter to the irresponsible demand for universal basic income, provides a solution to one of the biggest reasons people fall back into poverty, and could potentially unleash consumption because social security needs free up excess savings. The details and execution of the scheme are important but it probably represents and overdue human capital intervention that only government could make. And in a few years it could offer a potential alternative to employees and employers for ESI Corporation (India’s worst health insurance plans with a claims ratio of less than 45% ie. it only pays out less than half of contributions received as benefits).

The Provident Fund Reforms are substantial and clever. Subsidising job creation all over the world is an important policy priority but fraught with fraud. But the government paying the employer contribution for the next three years ensures this subsidy is almost like a direct benefit transfer and will leave an important audit trail that can be verified using Aadhaar. The employee contribution being reduced to 8% from 12% for women is a start; this money always belonged to employees and should always have been voluntary. The extension of fixed term contracts will also greatly increase formal employment by ending the regulatory arbitrage provided by the small informal sector to large employers. Employment should never have been marriage without divorce.

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And unlike other countries, fixed term employment in India has always had to comply with all labour laws so the exploitation argument was unfair. I anticipate that this decision could reduce the number of Indians on contact from 29% of the labour force to less than 20% and a share of the informal (or more accurately illegal) sector coming down from 99% to 60%. The most important data from the economic survey – 3.5 million new enterprises registered after GST – is evidence that there is nothing cultural about informality and Indians.

Manish Sabharwal
Executive Chairman, TeamLease Services

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