Accelerating formalisation

India has become more formal job friendly with recent ESIC reforms

In 1965 Professor Milton Friedman warned India that the Mahanalobis economic model being adopted “threatens an inefficient use of capital by combining it with too little labour at one extreme and an inefficient use of labour by combining it with too little capital at the other extreme”. Unfortunately he was right; a dysfunctional labour law regime over the next 50 years ensured that most of our 6.3 crore enterprises have created informal jobs with low productivity that pay low wages. Much regulatory cholesterol still exists but last week’s repricing of health insurance premiums to reflect costs for the Employee State Insurance (ESI) is an important labour law reform will accelerate enterprise formalization and social security penetration. 

ESI is often insultingly described as self-financing; unclear what that means because Rs 22,000 crore was confiscated from employee salaries last year by the Employee State Insurance Corporation (ESIC). More painfully, ESIC only paid out 50 per cent of the contributions it collected as benefits. This overcharging has not only lead to an unacceptable Rs 75,000 crore cash hoard, the revision of contribution rates from 6.5 per cent to 4 per cent will reduce employee salary confiscation for low wage employees— the only kind covered by ESI — by about Rs 7,000 crore. This tweak is not an argument against ESI but an acknowledgement of Renaissance physician Paracelsus’s warning “The dose makes the poison”. Anything powerful enough to help has the power to hurt if administered in the wrong proportion. 

This revision to contribution rates for the first time in 20 years is important for many reasons. It recognises that there is no reason to be accumulating huge amounts of cash confiscated from employees. It recognizes that past contribution rates have been higher than required. It recognises that in a cost-to-company world of compensation, salary is the property of employees. It recognises that an unreasonable gap between chitthi-waali salary (gross) and haath-waali salary (net salary in hand) breeds informal employment. It recognises an appetite to take on vested interests. It recognizes that social security reform is an important component of labour reform.

This scepticism about ESI is not cynicism about social security; a modern state is a welfare state and spreading India’s prosperity needs a well designed and sustainably financed safety net. However, ESI’s accountability for outcomes is weak even for plumbing problems; the portal is down often, hard copy requirements exist, hospital visit are often required for photos and doctor signatures, a six month block instead of three months or real time, challenges in transferring contributions and merging numbers, moving away from sub-code wise remittance, disconnect between branch offices and dispensaries, portal unable to accept accidents reports for the last three months, address of new dispensaries yet provided in portal, unclear procedure for correction of names, Joint undertaking procedure not implemented, and much else. 

Over the decades ESI has had weak oversight; what else explains the board not fixing excessive contribution rates and poor dispensary service? The only sustainable fixes are competition and governance. Sustaining reform will need governance overhaul; the current board of ESIC is too large (58 members), has too many generalists (no specialised sub-committees), is a geriatric ward (no age limits), has too little turnover among members (no term limits). The board does not think strategically about the Institution of ESI (the provision of health insurance) and ESI as an Institution (its human capital, technology, training, performance management, structure). ESIC needs competition; we must implement the previous NDA budget announcement that employees can choose who manages their premiums. Maybe we should merge CGHS with ESIC; nothing improves services more than getting rid of VIP rooms, lanes and access. If that is not acceptable, a second best choice may be merging ESIC with Ayushman Bharat; a medical rather than trade union “thought world” is better for contributors. ESI’s dysfunctionality is demonstrated by only enrolling 12 lakh of India’s 6.3 core enterprises over 70 years. GST enrolling the same number of enterprises within two years demonstrates that design is a powerful lever.

Dr. B. R. Ambedkar - whose 1943 report laid the foundations for the ESI Act in 1948 - said “A great man is different from an eminent one in that he is ready to be the servant to society”. ESI’s greatness comes from its monopoly rather service to society via capabilities, outcomes, and politeness. This must change. Social security is vital infrastructure but blindly copying the West without their incomes or recognizing the current problems of their safety nets is delusional. Important design issues for ESI - who pays, who delivers, who governs - need further review because an unintended consequence of past design is widespread low productivity employment with most Indian enterprises being dwarfs (small that will stay small) rather than babies (small that will grow). With few formal employers, there are few formal employees. Thankfully recent ESI reform indicates a willingness to deal with the labour laws that don’t protect employees and discourage formal employment.
 

Sabharwal is with Teamlease Services; Chakraborty is co-founder, Teamlease Services