Can’t have huge subsidies along with social security plans for all; important to push labour reforms as well
Given how expensive, and unproductive, Indian labour is in comparison to many of the country’s competitors, it is difficult to justify the government’s plans to roll out an extensive social security plan for workers if it is not accompanied by a slew of labour reforms—though hire-and-fire is an important part of labour reform, so is, for instance, allowing complete flexibility when it comes to overtime. But even if you assume the government does not want to go ahead with any labour reforms till such time it is in a position to give the workers something tangible, this is something that needs to be thought of seriously—the fact that there has been little action though the government has been in place for four years is worrying, since a large part of India’s relatively poor performance in exports of labour-intensive goods is related to the lack of labour reforms.
While it is true that some of the benefits being contemplated will be funded by other schemes being planned, the government needs to keep in mind that funding such a plan is impossible without a complete revamp of India’s current system of budgets. Health benefits for workers will, for instance, get subsumed in the ambitious National Health Protection Scheme (NHPS) that will be available to 10 crore households, so there is no need to provide for it separately. Indeed, once the scheme is fully rolled out, the government must think about whether it needs to carry on with the ESIC health scheme—workers need to pay a significant part of their monthly incomes for this, the benefits are not commensurate with the costs and the same contribution, if put into pension funds, will be more beneficial in creating a post-retirement corpus.
Indeed, while a pension fund is critical, since most Indians have very poor old-age cover, the government needs to think about whether this should be done through the EPFO which, given the kind of investments it is making, is a very expensive fund—finance minister Arun Jaitley had spoken of making it optional to use EPFO or a private pension fund three years ago, but nothing came of it.
Most important, the scheme will cost a lot. Though the details of the benefits have not been calculated so far, if the government is to give Rs 5,000 per year as provident fund contributions to 20 crore workers, say, that’s a cost of Rs 100,000 crore a year. Naturally, this cannot be funded from the annual budget that is already in deficit. So, the government needs to examine whether it, at the same time, needs to be providing an accident cover to nearly 13.5 crore people, life insurance to 5.3 crore people, crop insurance to 4.7 million farmers, heavily subsidised food to two-thirds of Indians, and run an inefficient procurement system that benefits only 4-5% of the total number of farmers in the country.
At the end of the day, the choice is between making visible contributions to the poor—and non-poor in the case of food subsidies—in the form of subsidised rations and making less-visible but long-term contributions to the well-being of citizens; given a choice, workers would prefer subsidised rations which they can consume right now to pension benefits that would be visible only when they retire. At a very basic level, it is like the choice between revenue and capital expenditures.