THe Blog

May 24, 2016

Fixing India’s Labour Law Cholesterol

Advisory Board member, Manish Sabharwal writes in this World Bank blog that changing the ways that India’s benefits regimes are funded would be the most impactful way to reform the country’s labour market.

 

"When people think of labour law reform in India they tend to think of the laws around hiring and firing; specifically, reforming Chapter 5B of the Industrial Disputes Act...

 

I would also argue that the most impactful labour law reform would be fixing our benefits regime. Under this regime, the mandatory deductions to gross wages are 45% for an employee with a Rs5500 monthly salary but only 5% for an employee on a Rs55,000 monthly salary. Making matters worse, this 45% deduction from low wages goes to programmes that give poor value for money; 55 million of 100 million Employees’ Provident Fund of India (EPFO) accounts are dormant. 

 

I would propose the following reforms, which would create three choices for employees in how their salary is paid:

 

  • ​Choice 1; Paying or Not Paying the 12% EPFO employee contribution
    The 12% employee contribution is an unaffordable salary deferment by low wage employees who have no savings. Employees should be allowed to opt out of this contribution at joining, pay this into their individual National Pension Scheme (NPS) or continue the status quo by paying to EPFO.

 

  • Choice 2; Paying the 12% employer contribution to EPFO or NPS       
    Currently most of the employer contribution to EPFO goes to the Employee Pension Scheme (EPS). Employees must be allowed to choose between EPS or diverting their entire employer contribution to their individual National Pension scheme individual account

 

  • Choice 3; Paying health premiums to ESI or an Insurance company 
    Employees should have the option to pay their monthly health insurance premium to ESI or buy a policy from any IRDA-regulated health insurance company."

 

Read the full article here.

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