Create millions of good jobs to exploit demographic dividend: Economic Survey

Workers can choose between higher take-home and contributing part of salary to EPF

The most pressing challenge for the country’s labour market is the creation of millions of ‘good’ jobs in the formal sector, without which the demographic dividend cannot be of much use. That seems to be the central message of the Economic Survey in the chapter on ‘Structural Changes in India’s Labour Markets’. The Centre, states and the private sector must play a significant role to clear obstacles in formal sector job creation, it has said. Regulation-induced taxes on formal workers and spatial mismatch between workers and jobs have been listed as the two top obstacles.

As a solution, the Survey has suggested a differential structure of the Employees’ Provident Fund (EPF), for the ‘rich’ and ‘lower earners’. The Survey has referred to EPF as an example of a subsidy for the rich. “Policymakers should consider whether lower earners should be offered the same choice — of whether to contribute part of their salaries to the EPF — which the rich have.’’ According to the Survey, with this step, there will be competition in the market for savings and also allow many liquidity-constrained low-earners to optimise according to their personal requirements.

It has elaborated on how the differential system would work. That is, the employer’s 12 per cent contribution to EPF would be unaffected. However, employees could choose whether or not to save 12 per cent of their salary into EPF and instead opt for a higher take home pay. “Such a change would effectively reduce the tax on formal sector labour, while leaving the informal sector labour costs unchanged.’’

The suggested system has perhaps been triggered by a study based on phone interviews with associates of one of India’s largest contract labour companies. The question was whether they would like to contribute to EPF or receive the same amount in cash. About 70 per cent of the respondents said they would prefer cash. “The most common explanation was that people wanted to spend their money sooner, suggesting either that workers are liquidity-constrained or impatient.’’

The second reason was the transaction cost associated with withdrawing EPF monies, especially after workers switch jobs.

Beside stressing that the Centre must ensure worker-centric labour regulations, by expanding worker choice and reducing mandatory taxes on employment, the Survey has suggested competitive federalism and relocation of jobs as measures to boost employment in the formal sector. It has rapped the system, saying the slow pace of labour reform has encouraged firms to resort to other strategies to negotiate “regulatory cholesterol”. One such popular strategy is to hire contract labour, it has said.
LOOKING AT LABOUR MARKET

• 50% of ‘good’ jobs in the formal sector (excluding govt) are in manufacturing
• Contract workers up from 12% of registered manufacturing workers in 1999 to 25% in 2010
• India’s GDP could grow by an extra 1.4% every year if women participated as much as men in the economy
• Rs 44,000 crore lies in 92.3 million inoperative EPF accounts
• Around 35% firms find dealing with EPF regulations challenging

Source: Economic Survey