Nov 25, 2014

Pains Of The Pay Cheque



In 1925, Motilal Nehru asked the chief of the Indian army: “What do you mean by Indianising the Indian army? The army is ours. What we want is to get rid of the Europeans in the Indian army.” Current labour laws that require employers to confiscate 45 per cent of the salary of employees whose wages are under Rs 1.8 lakh per annum and hand it over to various programmes and agencies like the Employees’ Provident Fund Organisation (EPFO), Employees’ Pension Scheme, Employees’ Deposit-Linked Insurance Scheme, Employees’ State Insurance Corporation deserve exactly the same quip. The money does not belong to these organisations or schemes and only a fool would argue that a person’s salary is not actually his property to dispose of as he chooses.

More importantly, and painfully, government data is clear that employees with wages this low do not have any savings. It is impossible, or at least very difficult, for them to live on half their salary. The next round of labour law reform must fix this injustice and give employees three choices in how they would like to receive their salary.

But first, let’s step back a bit. Labour law reforms are crucial for making India a fertile habitat for job creation and manufacturing. People who say they don’t matter have obviously never studied the effect of the Hartz committee labour reforms on the transition of Germany from being the sick man of Europe to the manufacturing dynamo that it is today. Recent ministry of labour announcements demonstrated courage and understanding that fixing the plumbing makes life easier for entrepreneurs. But the objective of the next round of labour reform should be to increase formal employment. India’s low productivity is rooted in painful transmission losses — our 6.3 crore enterprises only translate into 7,500 companies with paid-up capital of more than Rs 10 crore.

Informal employment is not entirely a result of our difficult hire-and-fire regime alone. It is largely because the move to a cost-to-company salary model, under which benefits are not over and above salary but reduce the amount that one takes home, is not attractive. The migration of youngsters from rural areas to India’s six biggest cities is already slowing down to a trickle because of the massive divergence between real wages (what employees care about) and nominal wages (what employers care about). But this painful real-nominal divergence is amplified further by the divergence between what employees call chitthi-waali salary (gross pay) and haath-waali salary (net take-home pay).

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