Provident Fund reforms must not ignore the budget speech
In 1920, Mahatma Gandhi responded to British politician Kinnock’s view that India would be reduced to chaos without British administration with a magnificent quip, “You are masters in someone else’s home. We will have our problems, but they will be ours, not yours”. India’s Employee’s Provident Fund Organization (EPFO) has always deserved the same quip; salary and provident fund contribution belong to employees, not EPFO; yet, individuals have no control on their level of contribution, investment allocation, and administrative provision. The finance minister’s budget speech announced the most important labour reforms announced in the last twenty years—two individual employee choices around employer pensions. Yet, the current draft of amendments proposed by the ministry of labour to the EPFO Act has ignored one of these choices, of making employee-funded contribution by low-wage employees voluntary. This must not be allowed.
First, some background. India’s employer pensions regime has three birth-defects; we have one of the most expensive pension systems in the world (EPFO charges 440 basis points for a government securities mutual fund), we have the most goofily-administered systems in the world (more than Rs 30,000 crore in 45 million of EPFO’s orphan accounts represent theft from low-wage workers) and we have one of the highest global levels of mandatory payroll confiscation (there is 45% difference between gross and net salary for low-wage employees). EPFO is overdue; a coalition of 500 employers submitted a request to the ministry of Labour earlier this year and economists raised the same point in the NITI Aayog pre-budget consultation with the prime minister. Acknowledging the power of competition and choice, the finance minister proposed two employee choices in the budget; employees could pay their monthly contributions to the New Pension System (NPS) or EPFO, and the employee-funded contribution to EPFO would become voluntary. The proposed amendments do include the NPS choice, but do not make the employee provident fund contribution voluntary.
India’s benefits regime is insanely regressive for low-wage employees; employers working in a cost-to-company model only need to deduct 5% of salary for employees with a salary of R55,000 per month, but need to deduct 45% of salary for employees with a salary of R5,500 per month. However, all savings data suggest that low-wage employees do not have such high savings; in fact, the massive difference between chitthi waali salary (gross) and haath waali salary (take-home) maybe the single biggest explanation for the fact that 100% of net job creation on the last 25 years has happened in informal jobs.
The amendments proposed by the ministry of labour do include a change to section 6 of the Provident Fund Act that allows a waiver of contribution for five years to an enterprise or class of enterprises. Not only does this change not create employee choice envisaged by the budget but it will unleash a regime of corruption and rent-seeking by industry bodies or individual employers seeking contribution waivers. Given the stakes, it will become a lucrative ATM machine for whoever is handing out contribution waivers. We need to explicitly recognise that employee contribution to Provident Fund is voluntary; this can easily be accomplished by small changes to section 6 and including a definition of non-self contributing employee in section 2(f).
There are other niggling problems with the proposed amendments. EPFO should be prohibited from collecting fees for contributions made to NPS (proposed section 16 (d)). EPFO is a public utility that should not generate surpluses on administrative fees; in fact, section 5 should be modified to reflect this no-surplus policy. We must reduce competitive barriers between EPFO and NPS; the current one-way lifetime option proposed in section 16 (b) should be made an option available every five years. Section 17 needs redrafting because EPFO regulates its competition (exempt funds run by companies) and we need to remove the role of EPFO in exemptions. Section 12 needs to be modified because it currently has the unintended consequence of not letting employees discontinue participation in EPFO once they cross the wage threshold; we need a process that allow employees who cross the specified wage threshold to voluntarily end future contributions. Most importantly, the proposed amendments do not reflect fixing the governance deficit of EPFO; section 5(a) should be modified to include a reduction in the number of trustees and impose term limits on trustees to end the geriatric ward that enables regulatory capture by one constituency.
At the completion of one year by the new government, it is important to remember that a five-year plan is not five one-year plans. This government was elected on the narrative of non-farm job creation and has begun many inputs; GST, land Bill, ease-of-doing business, Make-in-India, ministry of skills, smart cities, devolution to states, and much else. Labour laws matter for jobs; the changes by Thatcher in UK in the 1980s and the Hartz commission in Germany in 1999 were responsible for their industrial renaissance. Allowing Rajasthan to change labour laws was a political innovation that must be accelerated. But employer pension will need to be fixed in Delhi and EPFO has once again demonstrated that they will not cut the tree they are sitting on. India’s workers deserve the choice that the budget speech announced. Now, legislation must give it to them.
The author is chairman, Teamlease Services