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

Working With a Multigenerational Workforce: Benefits and Challenges

Benefits of a multigenerational workforce Each workforce from a different generation has a unique perspective shaped by their experiences, upbringing, and cultural influences; they bring...

Read More

Growth of Hospitality Industry in India 2023 and Prospects for 2024

Surging Opportunities and Hiring Trends in 2024 Fueled by a surge in travel, India experienced a remarkable 50% increase in hiring for tourism and hospitality...

Read More

Telecom Industry in India: The evolving landscape

Inventory in the Telecom Sector: In the telecom sector, inventory encompasses a range of tangible and intangible assets crucial for operations. This includes physical infrastructure...

Read More

Workforce Expansion Strategies: New Hiring and Replacement Plans

Workforce landscape among industries, cities and functions In the dynamic workforce landscape, specific industries are at the forefront, showcasing evolving and strategic approaches in shaping...

Read More

Job Market in India in 2024

Tech behemoths putting a stop to hiring? Silicon Valley's responses to economic downturns have impacted India's tech industry, with major companies halting hiring activities due...

Read More