Save or spend — The provident fund puzzle

The NDA government has thought up a novel way to crank up consumer spending in the country, which logically should give a leg-up to the insipid demand in the economy and eventually set the growth engine in motion.

On December 4, the Union Cabinet cleared the Social Security Code Bill, 2019, which, among other things, offers the option to millions of employees in organised sectors to reduce their share in the provident fund contribution and thereby increase their take-home pay.

At present, the employee’s contribution to provident fund is fixed at 12 per cent of basic salary. The employer also provides a matching amount to the fund, a portion of which goes to the pension corpus.

Though the contents of the code are not in the public domain, an Economic Times report suggests that the code will have a provision whereby the employee contribution to provident fund (PF) could be brought down below the 12 per cent threshold. However, by how much this contribution can be lowered will only be worked out after the Bill gets the approval of Parliament. The employer’s contribution to the PF will, however, remain at 12 per cent. Some experts are of the opinion that the rules may not be universal for all sectors and the government may allow such a reduction in certain sectors such as MSME, textiles, and start-up firms.

The Bill, which is likely to be tabled in Parliament soon, forms the last of the four codes that the government is trying to formulate as part of its ambitious labour reforms. The other three codes are: the Code on Wages, the Occupational Safety, Health and Working Conditions Code and the Industrial Relations Code.

While the Code on Wages was passed by Parliament in August, the Industrial Relations Code was introduced in the Lok Sabha in late November. The Occupational Safety, Health and Working Condition Code was introduced in the lower House in July, but was referred to the standing committee of Parliament in October. The committee’s report on the code is awaited.

The Social Security Code will incorporate eight central laws — Employees' Compensation Act, 1923, Employees' State Insurance Act, 1948; Employees' Provident Funds and Miscellaneous Provisions Act, 1952; Maternity Benefit Act, 1961; Payment of Gratuity Act, 1972; Cine Workers Welfare Fund Act, 1981; Building and Other Construction Workers Cess Act, 1996, and Unorganised Workers' Social Security Act, 2008.

Other than tweaking the employee’s contribution to the PF, the Social Security Code proposes several other key changes. According to the Economic Times report, the Bill proposes that fixed-term contract workers will be eligible for gratuity on a pro rata basis. This suggestion is linked to the Industrial Relations Code which had lobbed the fixed-term employment proposal. While the Gratuity Act needs to be changed for this purpose, as we have noted earlier, the calculation of gratuity for a fixed-term worker may turn out to be a tough task.

The Bill, however, has spiked the move to give subscribers to the Employees’ Provident Fund Organisation (EPFO) an option to switch to the National Pension System vis-à-vis the Employee Pension Scheme under the EPFO. The labour ministry has argued that the current arrangement provides multiple benefits such as higher rate of return and exempt-exempt-exempt status to funds invested in the EPFO. The ministry had also decided to retain the existing autonomy of the EPFO and the Employees’ State Insurance Corporation, rejecting the proposal to corporatise them.

The Labour Ministry’s stand suggests that many within the government are perhaps not very comfortable with market-linked returns for superannuated people and they prefer to retain control over how the PF corpus is deployed and the interest it earns.

When the nodal ministry for the PF money is of such a view, it is a bit strange that the Bill on Social Security Code is pushing for a cut in the employees’ contribution to the PF, which will enhance present spending but lower their retirement corpus. In a country where household investment culture is not very vibrant as yet, the contribution to the PF is some sort of a forced saving that helps employees build their nest egg.

There is another vital point. According to reports, annual accruals to the EPFO by way of statutory contribution of employee and employer are to the tune of Rs 1.3 lakh crore per year. So by reducing contribution of employees by two or three percentage points in some sectors will lead to less than Rs 3,000 crore per annum increase in spending. This is a meagre amount to boost consumption at a time when the GDP has slowed to a six-year low.

While every Indian has a role to play in the nation-building process, the government must ensure that the future of millions of employees is not sacrificed while trying to ratchet up the current growth rate of the economy.

Abhijit Kumar Dutta is a freelance writer. Views expressed are personal.