organised sector will be forced to have 24% of their salaries mandatorily deposited with EPFO

Once the government raised the minimum wage, it was not surprising the Employees Provident Fund Organisation (EPFO) began clamouring for a hike in the ceiling wage beyond which monthly contributions to EPFO are not mandatory—most organisations, though, deduct EPFO for even higher-paid employees as labour bureaucrats seem to feel it is mandatory. So, after raising the ceiling from `6,500 per month to `15,000 in 2014, this has now been raised to `25,000.
Immediately, 50 lakh more employees in the organised sector will be forced to have 24% of their salaries mandatorily deposited with EPFO. Given the virtually non-existent social security India has, it is not surprising the government would want to get more people to save in EPFO-like retirement schemes, but it needs to look at the costs of doing so. Indeed, it is the high costs of the EPFO that made finance minister Arun Jaitley, in one of his budget speeches, talk of how the EPFO was said to have hostages, not subscribers—such is the EPFO’s power, though, Jaitley has not managed to free the hostages to allow them to invest elsewhere.

While, till recently, the EPFO didn’t even invest in the stock markets, it charged a fee that was so high—3.3% of monthly contributions—it made it the world’s most expensive mutual fund. In FY15, it earned `4,904 crore on this account and even if you assume all of its `1,766 crore expenditure was kosher, it ended up with a surplus of `3,137 crore. Other government-run schemes, like the Employee State Insurance, similarly make huge surpluses from employees who have no option but to subscribe to them—the ESI’s payout ratios are in the 45-50% range as compared to over 90% for most private insurers, indicating just how much extra premium it charges. Thanks to EPFO-ESI type of deductions, the Economic Survey 2016-17 points out people who earn under `20,000 a month receive only 55% of their salary in hand—this huge difference between chitthiwali and haathwali salary makes unorganised sector employment more attractive. Ironically, it is to eliminate this distortion that, for instance, the government came out with a package for the apparel industry as well as for some others that allowed workers to escape the mandatory EPFO tax. So, on the one hand, the government plans several carve-outs to allow workers to escape from the EPFO, and on the other, it makes it more difficult for workers to escape by raising the EPFO ceiling. The government’s left hand, as the old saw goes, doesn’t know what its right is doing.