Expanding formal employment: India's labour laws need desperate surgery

The Employee State Insurance Corporation (ESIC) is a monopoly for employer financed healthcare. This monopoly gives it a return on equity (ROE) of over 17,000 per cent, which is worrisome since the ROE for great companies with satisfied customers like Naukri.com, TCS, and Hindustan Lever are 105 per cent, 33 per cent, and 67 per cent respectively. The ESIC not only has millions of unsatisfied customers but offers poor value for money — the ESIC pays out less than 50 per cent of contributions as benefits while there is hardly an Indian commercial health insurance plan that has a claims ratio of less than 95 per cent. Its cash surplus of Rs  70 billion ever year on total capital employed of Rs 1.5 billion has created cumulative reserves of over Rs 500 billion. Formal job creation desperately needs labour reform but instead of equating reform with hiring and firing workers — the infamous Chapter 5B of the Industrial Disputes Act — we’d like to make the case that the best place to start labour reform is creating competition and reforming the governance of the ESIC (also EPFO, but we will cover that in a future article). No modern private company in India has a return on equity of 17,000 per cent. Surely no government corporation should.

 
ESI reform should start with three interventions of fairness, governance and competition. First, like any health insurance scheme in the US, they should be required to return any premiums collected above an 85 per cent claims ratio to payers in the following years. Second, we should fix the governance of ESIC; a smaller board, a retirement age, a term limit of eight years for board members, true employer representation, etc. Third, we should create competition for ESIC by allowing individuals to buy health insurance from other providers. After these three immediate steps, ESIC should be included in a broader debate of how health care will be financed particularly after the budget health care announcement. We acknowledge that neither the US nor UK models seem to work in meeting the conflicting objectives of quality, quantity and cost because, as health expert Nachiket Mor points out, health markets have three problems — Hyberbolicity (underestimation of need), Coordination (market failure) and Information Assymetry (between patient and provider, provider and doctor, and doctor and latest knowledge). The new national health insurance program is an interesting new vehicle; maybe ESIC should hand over its cash balances to the government — it represents unfair overcharging — and include all their members in that scheme.

 
Mandatory Employer financed healthcare has important implications for labour and healthcare markets. A cap on salaries in the United States during World War 2 had the unintended consequence of exploding employer financed healthcare (American companies are now liable for covering healthcare insurance costs for two-thirds of the country’s population. But this could explain the frequently quoted real wage stagnation of the US; health benefits from employers now account for 20 per cent of total worker compensation (up from 7 per cent in the 1950s) and health care costs now approach an unaffordable 20 per cent of US GDP. An interesting recent development is a partnership between Amazon, Berkshire Hathaway and JP Morgan that aims to deliver “simplified, high-quality and transparent health care at a reasonable costs” evolved in response to what Warren Buffet called “a tapeworm eating away at our economic growth and prosperity”. We wish them luck but sense that it may take more than bulk buying to solve America’s health care cost spiral.

 

Over the last few years the increase in formal employment from 10 per cent of the labour force to 15 per cent (as indicated by EPFO/ESI) to payments) or 25 per cent (as indicated by employers who pay GST) has been an important indicator of the lazy cultural explanations for India’s informality. Improved enforcement and big moves like demonetisation, GST, Rera, FDI-limit raising, Shell company evisceration, etc have led to an increase to GST registered enterprises crossing 10 million. But only 1.3 million enterprises pay EPFO and ESI; with structural reform to these organisations, this number could easily triple.

 
But the current acceleration in formal employment will surely slow without deep and broad changes to our labour laws. We have too many of them, too many of them contradict each other, most need too much paper, and most confuse regulation with supervision. Dropping the draft Bill that exempted small organisations from many laws was the right thing to do; it would have created an arbitrage opportunity at best, and at worst, an apartheid. The lowest hanging fruit is a single labour code (we really don’t need three or five), a Universal Enterprise Number (another important announcement of the budget that was missed by the commentariat; clearly many of them have not actually run businesses and dealt with pain and corruption of the more than 27 numbers that every company has right now). The UEN should enable all labour laws to go paperless, presenceless and cashless from April 1, 2019. It’s sad that the Income tax department beat the labour ministry in adopting e-assessment; the least they can do now is copy it. 

 
India’s formal jobs problem — the wage premium — is often confused with a jobs problem. India’s labour laws need desperate surgery. The best place to start massively expanding formal employment is not breaking the back of formal employers but catching the neck of ESI. The writers are with Teamlease Services