Dr. Karthikeya Naraparaju and Dr. Ajay Sharma
Economics Area, IIM Indore
Email: kathikeyan@iimidr.ac.in & ajays@iimidr.ac.in ; Phone: 0731-2439596/622
Introduction:
There is an intense debate in academic as well as policy circles on the impact of labour regulations on economic activity in India. This debate has largely been focused on whether and to what extent labour regulations hamper the growth of well-paying jobs in India. Two aspects of this debate stand out. First, there is an excessive focus on select labour laws that pertain to restrictions on retrenchment of employees (such as the Chapters V-A and V-B of the Industrial Disputes Act, 1947 (IDA)[1] and this comes at the cost of a relative neglect of the impact of other labour regulations. Some of these other regulations actually have lower firm size thresholds (for a firm to come under their purview) than the IDA and, given the preponderance of small firms in the Indian economy, affect a much larger set of firms and workers employed in them. The second aspect is with regard to inadequate emphasis on the extent and nature of compliance with labour regulations. The analysis on compliance is crucial since the actual impact of a legislation (de jure) can only be gauged by looking at its implementation (de facto). Given this, it is surprising that there is hardly any evidence in India on the extent to which labour regulations are complied with on the ground. [2]
In a recent essay (Naraparaju and Sharma, 2017), we attempted to fill this gap by looking at compliance with an important labour regulation pertaining to workers’ social security: the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (hereafter, EPF Act). Under the Employees’ Provident Fund Scheme, 1952 (hereafter, EPF) and the Employees’ Pension Scheme, 1995 (hereafter, EPS) that were formulated under the EPF Act, establishments employing 20 or more workers are mandated to provide social security contributions towards the provident fund (a pension and contingency fund) of those employees whose wages are below a certain threshold[3]. In addition, workers enrolled in the EPF are also required to contribute a share of their earnings to their fund. [4]
One of the key reasons for focusing on the EPF Act[5] was that unlike the IDA or the Factories’ Act 1948, which are applicable only to the manufacturing sector, the EPF Act has wider coverage in terms of the sectors of work. Moreover, there is also a debate on the extent to which EPF is helpful to the workers. On the one hand, the EPF enables workers’ access to social security. On the other hand, it is argued that the mandatory contributions under EPF impose a substantial monetary burden on the workers, reducing their monthly ‘take-home’ pay and thus might be counter-productive for worker welfare (Sabharwal, 2014; Government of India, 2016). Even before one investigates the relative merits of these arguments, to match these concerns with ground realities, it is important to know the extent and nature of compliance with the EPF Act. The objective of our essay was to provide such estimates and also look at the correlates of non-compliance with EPF Act.
Data:
Given that non-compliance with labour regulations is illegal, it is not possible to obtain estimates of evasion from a direct survey of enterprises. However, we can discern such phenomena by looking at the responses given by the employees to a labour force survey. Since 2004-05, the National Sample Surveys on Employment and Unemployment Situation (NSS) have captured data on workers’ (self-reported) access to various social security provisions made by their employers. In addition to health and maternity benefits, this also includes employers’ contributions to employees’ pension and various provident funds including, General Provident Fund, Contributory Provident Fund, Public Provident Fund, Employees Provident Fund, etc.
We use data from the 2004-05 (the 61st round) and 2011-12 (68th round) NSS surveys to arrive at estimates of non-compliance with the EPF Act. If employees coming under the purview of the Act by virtue of earning less than the threshold wages (Rs. 6,500 per month before 2014) and by being employed in a firm that is large enough (i.e. employing 20 or more workers), claim to be not receiving any provident fund or pension payments, we interpret this as non-compliance with the Act[6]. Further, we do not consider workers employed in the state of Jammu and Kashmir because they do not come under the purview of the EPF Act. Moreover, we also exclude workers employed in cooperatives, trusts and non-profit firms, due to lack of identification for eligibility under the EPF Act.[7] Further we only consider those workers who are classified as ‘regular salaried or wage workers’ in the NSS dataset.
Results:
Our estimates suggest that the evasion of the EPF Act is quite widespread: in 2011-12, 75 percent (6.3 million) of regular salaried employees earning wages below the threshold and working in establishments employing 20 or more workers have reported to be not receiving provident fund benefits. This has increased sharply from 46 percent (4.2 million) in 2004-05. These individuals constitute about 10 percent of the total workforce employed in regular salaried jobs, in the respective years.
When we look at the type of enterprises where workers whose PF payments are evaded are employed, we see that in 2011-12 (2004-05) about 40 (34) percent were employed with public and private limited companies, about 39 (36) percent were employed with male proprietary establishments and about 9 (13) percent were employed with government/public sector establishments.
Based on the two-digit National Industrial Classification code, we find the following industries to be employing more than 5 percent of workers whose payments are evaded in 2011-12: manufacturing of products such as wearing apparel (7 percent in 2011-12; 9 percent in 2004-05), non-metallic mineral products (6 percent in 2011-12; 3 percent in 2004-05), textiles (6 percent in 2011-12; 12 percent in 2004-05), food products (6 percent in 2011-12; 5 percent in 2004-05), and leather and related products (5 percent in 2011-12; 5 percent in 2004-05), other sectors include education (5 percent in 2011-12; 6 percent in 2004-05) and waste collection activities (5 percent in 2011-12; zero in 2004-05).
We find that lack of written job contracts is an important correlate of non-compliance with the EPF Act. For instance, when we look at those who should be getting PF payments (i.e. those who are earning less than the wage threshold and are working in enterprises with more than 20 workers), we see that in 2011-12, about 76 percent of such workers do not have a job contract. Within this sub-sample, we see that among those who actually have access to PF, about 46 percent have access to job contract. On the other hand, among those who do not have access to PF, only 16 percent have a job contract.
Discussion and Conclusion:
There could be various reasons for such large evasion of the EPF Act.[8] From the employer’s perspective, making contributions on behalf of employees could impose a substantial pecuniary burden, especially for the smaller and less productive firms. On the other hand, there is the argument that employees, especially those earning relatively low wages, themselves prefer to receive greater cash-in-hand rather than contribute a substantial proportion of their salaries into the EPF accounts for future use (see Government of India, 2016 Volume 1, Chapter 10). The employers might oblige the workers, but in order to avoid coming under the scrutiny of the enforcement authorities, take care that there is no written proof that they employ the worker. Thus, the burden of the provision of these benefits might unintentionally drive the workforce towards informal employment.
While it is important to take cognizance of employer and worker constraints in accessing EPF, it is not in the workers’ best interests (of having a retirement corpus) to do away the legislation altogether. It is in this context that the recent government initiative in the form of the Pradhan Mantri Rojgar Protsahan Yojana (PMRPY) is a step in the right direction. Launched in August 2016, the PMRPY aims to incentivize job creation for semi-skilled and unskilled workers by providing complete subsidy on employers’ contributions to the provident fund of all new employees earning up to Rs. 15,000 per month, for a period of three years. It is hoped that this will act as a catalyst for widespread generation of productive jobs (and those with social security and other benefits) that India desperately needs to leverage its ‘demographic dividend’ for enhancing its economic growth and reducing poverty. Moreover, such a future will also help us achieve the United Nations Sustainable Development Goal on ensuring ‘decent work’ for all.
ORIGINAL ARTICLE: Naraparaju, Karthikeya, & Sharma, Ajay (2017). Labour Regulations and Worker Welfare: The Case of Provident Fund in India. India Development Report 2017 edited by S. Mahendra Dev, Oxford University Press.