Letting people migrate to NPS that gives better returns was an easy reform, but govt hasn’t even delivered on this.
Given that not too many people were expected to lose their jobs due to this—as compared to, say, privatising Air India or BSNL—nor was any expenditure by government involved, most expected that then finance minister Arun Jaitley would be able to deliver on his promise, made in the 2015 budget, of freeing people from the clutches of the Employees Provident Fund Organisation (EPFO) and the Employee State Insurance Corporation (ESIC). After Jaitley said “it has been remarked that both EPF and ESI have hostages, rather than clients”, what he promised was quite simple. In the case of the EPFO, instead of working people being forced to invest their money here, they would be allowed to migrate to NPS, which gives better returns, is more flexible, and charges smaller commissions. And, as an alternative to the ESI, employees would be free to buy any regulated insurance product.
Both the EPFO and the ESI are very expensive, so any relief would have been welcome; at lower levels of income, as the Economic Survey documented in 2016-17, over 40% of salary levels were eaten up by EPFO/ESI contributions, and this has possibly contributed to the workers’ preference for informal employment. Given that, until recently, the EPFO didn’t even invest in equity, it was perhaps the world’s most expensive debt mutual fund; and, while its returns are higher than those offered by bank fixed deposits, they are lower than the average returns offered by the NPS, even when you don’t go in for NPS schemes that invest more in equity. As for the ESI, its costs are best brought out by the fact that its payout ratios are 35-50% versus 95-100% for most medical insurance products; as a result of high annual surpluses, its reserves have ballooned to over `75,000 crore, and it is even building medical colleges from this!
Despite the government wanting to push these reforms, however, the trade unions—in the case of EPFO—have been able to ensure that close to five years later, Jaitley’s promise remains unfulfilled. Most trade unions, reportedly, even boycotted discussions on allowing a shift to NPS. Nor is it quite clear why the unions are opposed to it; it is true that if there is a large enough shift, trade union leaders will be in charge of a smaller EPFO corpus, but given they don’t earn any money from it, their opposition makes less sense. The only other explanation is that the EPFO payouts—in terms of pension promises—are too generous, and are, right now, being mostly funded from the fact that more people join the EPFO than those who retire; once this changes, the EPFO may not be able to fund such generous pensions. In the case of the ESI, the opposition is easier to understand since those that benefit from this lucrative cash cow will lose out. What is worrying, though, is that if the government can’t deliver on such a simple reform, how will it deliver on the more difficult ones? Despite talking of opening up the coal sector to private miners, for instance, no mines have been allotted to commercial miners; state-owned banks keep raising employee wages without much regard to whether they are even needed in today’s tech-driven banking, and the much-needed hire-and-fire and other labour reforms continue to get delayed even though, once enacted, they will result in increased employment. For those looking for sweeping reforms, the EPFO-ESI failure is symbolic of the government’s timidity.