Social security scheme is good politics but a mixed bag for the economy

Shishir AsthanaMoneycontrol Research

With an eye on state and general elections, the government is set to roll out a social security scheme across the country for the unorganised sector.

While the organised sector is already covered by various social security laws like those governing provident funds, pension funds and insurance schemes, employees in the unorganised sector have to fend for themselves.

The scheme reportedly aims for universal coverage that is outside the ambit of the EPFO (Employee Provident Fund Organisation) and the ESIC (Employee State Insurance Corporation).

The central government is working with states to bring them on board for part-financing the scheme. In the current scenario, in a company in the organised sector, the employee and employer contribute equal amounts towards EPFO and ESIC. But in the unorganised space, both the central and state governments are expected to be the only contributors and employees will not be made to share the burden.

When implemented, the scheme would be a big boost for employees working in the unorganised sector. The scheme will cover mandatory pension, insurance against disability and death, and maternity coverage, alongside optional medical and unemployment coverage. In short, it will take care of the risks that an employee working in the unorganised sector is exposed to.

However, the move will have repercussions on the economy – some positives and some negative.

Firstly, it will increase government spending and bloat its finances, leaving lesser room for developmental work. Since the coverage is expected to increase multifold, as 83 percent of workers are in the unorganised space, the impact on the overall economy will be huge. The government is yet to work out the cost of this move.

On the other hand, money will flow from the government’s account into the provident funds, pension funds and insurance accounts of the individuals. This money will reside in the funds which generally invest in government bonds. In other words, most of the money will come back to the government but there will be an added cost to it as the government will have to repay the amount to the employees along with an interest cost.

The biggest beneficiary will no doubt be the employees as their risk is getting covered. Many employees in the unorganised sector use the Public Provident Fund (PPF) as a proxy for provident fund investments that are available to organised players. With the government taking care of the risk, money will be freed for these employees either to invest in higher yielding investments or can be utilised in spending on consumables or non-consumables, which are both beneficial for the economy.

Apart from these direct impacts, an indirect benefit of the move will be that it will throw up data points like employment and other economic parameters which were not available. It will also help in weeding out a number of non-existent employees that many promoters use to show higher expense and file lower taxes.

A social security scheme for the unorganised sector was long overdue. However, the timing of implementation suggests it is political in nature as the cost of the move will be felt over the next few years but the government can claim a ‘moral victory.’