If the government intends to remove the mandatory 12% PF contribution, then it must introduce social security scheme for employees to survive after retirement
A media report captioned “Union budget may boost take-home salaries” published in The Hindu on Friday, sends out disturbing signals. According to the report, the Union Budget 2016-17 is likely to announce measures to put more money into the hands of employees with a monthly income up to a threshold, like Rs10,000 for instance, by doing away with their mandatory 12% contribution for provident fund (PF) savings. We will definitely have to wait for more details till 29 February 2016 on which day the Union Budget will be presented. Meanwhile, one cannot resist the temptation to caution stakeholders against the harm the proposed measure may do to a fairly good-working and acceptable social security arrangement that exists in the organised sector.
On the face of it, the proposal to discontinue recovery of provident fund contribution from wages of employees with low income, would appear a worker-friendly initiative, putting more money in the employees’ pockets. In effect, the move reduces the corpus intended to take care of the employee’s retired life by half. As there are no social security systems of the kind available in developed countries, workers in the organised sector are protected to some extent by their savings through PF contribution. It is cruel on the part of government to lure them by promise of more take-home pay by reducing their forced savings for a genuine purpose.
Such a gesture to reduce employees’ contribution should be made only where employers are able to compensate by increasing their contribution to PF to the extent employees’ contribution is reduced.
Ethically, smuggling such drastic measures through budget proposals, which get through without adequate informed discussion in compelling circumstances, should not be an option. This happened in the case of withdrawal of Defined Payment-based Pension Scheme, when New Pension Scheme (now National Pension System -NPS) was introduced sans legislative procedure. As the scheme was made applicable for employees who joined subsequently, no one noticed the harm inherent in the measure. NPS was deliberately excluded from the Terms of References of the VI and VII Central Pay Commissions (CPC). On receipt of a host of representations, VII CPC examined the NPS in some detail and the findings find a place in Chapter 10.3 of the Commission’s report.
Now the mistake in respect of NPS is likely to be repeated now in the case of employees PF Scheme. Legislative processes should not be skipped for administrative expediency or on grounds of political compulsions.
is former General Manager, RBI, Mumbai and author of the 2014 book "Banking, Reforms & Corruption: Development Issues in 21st Century India")