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