Given that regulatory imposts like EPFO and ESI take away a significant part of the salary, and the difference this makes for those with low salaries, most employers have found that employees who draw low salaries prefer their salaries in cash.
Given that regulatory imposts like EPFO and ESI take away a significant part of the salary, and the difference this makes for those with low salaries, most employers have found that employees who draw low salaries prefer their salaries in cash. This also worked well for employers as well since, not paying workers by cheque helped keep the entire business away from the taxman’s glare; to the extent the workers were off books, rigid labour laws didn’t apply to these units either. While paying workers in cash helped lower costs and created jobs, it had a serious problem. And that was, since the attempt was to remain below the radar, the firms that got created were invariably small and unable to become truly competitive—in the case of ready-made garments, for instance, the sharp growth in Vietnam and Bangladesh’s exports are proof that Indian units aren’t competitive enough.
So, in order to encourage formalisation of existing companies, as also to create new jobs in the formal sector, the government came up with the Pradhan Mantri Rojgar Protsahn Yojana (PMRPY). Under this scheme, the government would bear the entire EPFO contribution of the employers (12% of basic pay)—for employees earning less than Rs 15,000 per month—for three years; this amount was capped at 8.33% earlier, but was increased in the last budget. While the scheme had poor traction initially, according to an FE story, over one lakh units are covered by this scheme today and have around 85 lakh employees. Apart from the fact that the scheme helped create more formal employment by lowering the monthly imposts on employees, what must also have played a role was the introduction of GST since, sooner or later, most firms in the country will come under its ambit.
While these jobs aren’t necessarily new ones since even existing firms may have used the PMRPY to shift workers to formal contracts, it is a very sensible and low-cost way to encourage formalisation. Indeed, since the government now has a system to make payments directly into the bank accounts of people using Aadhaar—a large amount of subsidy payments are, in any case, being made this way even today—it would be a good idea if the government started making pension contributions for workers with low monthly incomes and, if need be, cut some subsidies to fund this. This is critical since India has a very low pension cover, and given their monthly earnings, not too many are willing to set aside their incomes for the future. The lack of old age cover, however, has become a serious problem, and the sooner the government starts addressing this, the better.