India became more formal job friendly with recent ESIC reforms

In 1965 Professor Milton Friedman warned India that the Mahanalobis economic model being adopted “threatens an inefficient use of capital by combining it with too little at one extreme and an inefficient use of by combining it with too little capital at the other extreme”. Unfortunately, he was right; a dysfunctional labor law regime over the next fifty years ensured that most of our 6.3 enterprises have created informal jobs with low productivity that pay low wages. Much regulatory cholesterol still last week’s of health insurance premiums to reflect for the Employee State Insurance (ESI) was not only an overdue recognition that salary is the property of employees but it is an important law reform will accelerate social security penetration.

ESI is often insultingly described as self-financing; unclear what that means because Rs 22,000 crore was confiscated from employee salaries last year by the Employee State Insurance Corporation (ESIC). More painfully, ESIC only paid out 50% of the contributions it collected as benefits (laws in many countries require insurers to refund all premiums below 75%. This overcharging has not only led to an unacceptable Rs 75,000 crore cash hoard, but made ESIC the company with the highest Return on Equity in India (5000%+) despite angry customers, weak health outcomes, and mission creep. The revision of contribution rates from 6.5% to 4% will reduce employee salary confiscation for low wage employees – the only kind covered by ESI – by about Rs 7,000 crore. This tweak is not an argument against ESI but an acknowledgement of Renaissance physician Paracelsus’s warning “The dose makes the poison”. Anything powerful enough to help has the power to hurt if administered in the wrong proportion.

This revision to contribution rates for the first time in 20 years is important for many reasons. It recognizes that a government corporation has no reason to be accumulating huge amounts of cash confiscated from employees. It recognizes that past contribution rates have been higher than required. It recognizes that in a cost-to-company world of compensation, salary is the property of employees. It recognizes that an unreasonable gap between – salary (gross) and Haath-Waali salary (net salary in hand) breeds informal employment. It recognizes that ESIC treats contributors, not as clients but hostages. It recognizes an appetite to take on vested interests. It recognizes that social security reform is an important component of labor reform. Most importantly, it recognizes that social security schemes must be social and offer security.

This skepticism about ESI is not cynicism about social security; a modern state is a welfare state and spreading India’s prosperity needs a well designed and financed safety net. However, ESI’s accountability for outcomes is weak even for plumbing problems; the portal is down often, hard copy requirements still exist, hospital visit are often required for photos and doctor signatures, a 6 month block instead of 3 months or real-time, challenges in transferring contributions, merger or continuity of numbers between employers, moving away from sub-code wise remittance, disconnect between branch offices and dispensaries, accidents reports could not be filed in portal online during the last three months, address of dispensaries has not yet provided in portal for newly implemented and fully implemented districts, No clear procedure for correction of names and dates of joining, Joint undertaking procedure (like in PF) not implemented, and much else. Additionally, the family pension obligation fits better with EPFO’s mandate and ESI’s decision to run medical and dental colleges must be unwound.

Over the decades ESI has had weak oversight; what else explains the board not considering excessive contribution rates and poor dispensary service as harassing contributors? The only sustainable fixes are competition and governance. Sustaining reform will need governance overhaul; the current board of ESIC is too large (58 members), has too many generalists (no specialized sub-committees), is a geriatric ward (no age limits), has too little turnover among non-government members (no term limits) and has too much turnover among government nominees (poor institutional memory). The board currently does not think strategically about the Institution of ESI (the provision of health insurance) and ESI as an Institution (its human capital, technology, training, performance management, structure). ESIC will only get its act together if it faces competition; we must implement the previous NDA budget announcement that employees can choose who manages their premiums. Maybe we should merge CGHS with ESIC; nothing improves services more than getting rid of VIP rooms, lanes and access. If that is not acceptable, a second best choice may be merging ESIC with Ayushman Bharat; a medical rather than trade union “thought world” is better for contributors. ESI’s dysfunctionality is demonstrated by only enrolling 12 lac of India’s 6.3 core enterprises over 70 years. GST enrolling the same number of enterprises within two years demonstrates that design is a powerful lever.

Dr. B. R. Ambedkar – whose 1943 report laid the foundations for the ESI Act in 1948 – said “A great man is different from an eminent one in that he is ready to be the servant to society”. ESI’s greatness comes from its monopoly rather service to society via capabilities, outcomes, and politeness. This must change. Social security is a vital infrastructure but blindly copying the West without their incomes or recognizing the current problems of their safety nets is delusional. Important design issues for ESI – who pays, who delivers, who governs – need further review because an unintended consequence of the past design is widespread low productivity employment with most Indian enterprises being dwarfs (small that will stay small) rather than babies (small that will grow). With few formal employers, there are few formal employees. Thankfully recent ESI reform indicates a willingness to deal with the labour laws that don’t protect employees and discourage formal employment.


Manish Sabharwal

Exec. Vice Chairman & Co-Founder
TeamLease Services Ltd

Rituparna Chakraborty

Co-Founder & EVP
TeamLease Services Ltd

Latest Blogs

Formalisation of India’s Labour Market

Government Initiatives The government has launched several initiatives aimed at transitioning to a more formal labour market: Make in India: This initiative aims to make...

Read More

Healthcare & Pharma Jobs in India: Key Drivers and Opportunities

Technology Integration and R&D Investments: Technology is rapidly transforming healthcare delivery and fostering job growth. Advances in telemedicine, AI diagnostics, health analytics using big data,...

Read More

Evolving Female Labour Force Participation In India: The Next Growth Chapter

Understanding from the ground level To tackle the issue of low women's participation in the workforce, it is crucial to first comprehend the existing landscape....

Read More

Is the Annual Performance Appraisal Moving Beyond Monetary Compensation?

Key non-monetary incentives Flexible working arrangements: Offering flexibility in working hours and remote working options can significantly improve employee satisfaction and work-life balance. Professional development...

Read More

What is the future of the semiconductor industry in India?

Government initiatives and schemes for the Semiconductor Industry in India The Semicon India Program has fortified India's strides towards a robust semiconductor industry. The government...

Read More