PF reforms and roll backs: an irrational urgency

The government in its zestful reform mood has sought to play dangerously with workers’ social security funds especially the Provident Fund (PF). The Economic Survey 2016 argued for liquidating employers’ contribution to PF to increase the take-home pay (solving their liquidity constraints) and to provide more choices of investment to low-income earning workers.  It is interesting to note that the government has been eying solely the employers’ part of the contribution to PF.

Then came the Union Budget shocker which, in the name of bringing about parity in New Pension Scheme and others, decided to impose tax at the time of withdrawal on 60% of the contributions made after April 1, 2016, to EPF and other schemes saved in case of conversion of it in the form of annuities.  Further, the finance minister also proposed to tax employees in respect of whom a contribution of more than 1.5 lakh per annum to the fund was made by the employer.

This would have impacted the structure of wage negotiations significantly, as employees’ unions instead of asking for higher basic pay to boost their PF contributions, would prefer other forms of benefits. Due to  wide-spread protests especially by the salaried middle class, both the proposals were rolled back.

A couple of days ago, an unusual and spontaneous protest by garment workers in Bengaluru erupted against the government’s move to restrict early withdrawals from PF by amending the EPF scheme. As per a notification issued by the government on February 10, following cessation of employment, if an employee who subscribes to the fund remains unemployed for 2 months or more, she would be entitled to withdraw only the contribution paid by her along with the interest earned thereon.

Prior to this, an employee who remained unemployed for a minimum period of 2 months following cessation of employment could withdraw the full amount credited in the fund. The notification enhanced the age limit for withdrawal by upto 90% of the due amount from 54 to 57 years. As a result, the eligibility period for withdrawal is prolonged. Following the protests on April 19, the government swiftly withdrew the notification dated February 10.

The government advances 3 reasons to justify the proposals relating to PF – to widen the choice of the workers as economic agents; to make the funds market more competitive and; to curb the consumptionist tendencies of the workers. Moreover, the government adopts a “paternalistic” view of the workers’ welfare by regulating workers’ savings and funds and seeks to “educate” the workers on financial prudence. The government is using the fiscal instrument of tax to discipline the deviant behaviour of workers and to establish parity between defined benefit and defined contribution schemes in order to take the sheen out of the former. 

In fact, trade unions tell the government that the workers are mature enough to decide on the utilisation of funds and are acutely aware of the need for social security as vested individuals.

The fundamental premise is that PF is their money which they are entitled to withdraw and use as and when required. Also, whether or not the PF amount should remain untouched until they attain the age of retirement is a matter that should be left to their choice. At a time when closures, prolonged lockouts, dismissals on account of victimisation and en masse termination of workers on one pretext or the other are commonplace, it is extremely doubtful whether employees subscribing to the fund would be retained in employment till the age of 58 years. The aforesaid amendments were therefore viewed as unjust as they severely curtailed the rights of employees to access and use their own money as required. While the government may have issued the notification believing that the fund could afford effective social security to employees at the end of their working lives only if early withdrawals from the fund were restricted, the government has not considered the possibility that the fund-owner’s choices may be different. These weaken the case of the government.

Ruthless unilateralism

While it is apparent that the government has acted in a unilateral manner, in the wake of protests, it states that it has consulted trade unions, a claim refuted by them. In fact, the government making such a claim and the trade unions invariably refuting it thereafter has emerged as a pattern ever since the government has embarked zealously on the labour reform agenda.

Such unilateralism reflects a nagging desire on the part of the government to introduce “some reforms relating to labour” so as to send positive signals to the investors. However, it has been doing so at a tremendous cost as such unilateral initiatives only serve to alienate the working class. The International Labour Organisation has emphasised that effective and thorough consultations with workers’ organisations should precede the introduction of legislative changes that impact the interests of workers. It has pointed out that effective social dialogue would in fact boost the legitimacy of reform efforts of the government.

The protests and roll-backs should serve as a wake-up call to the Central as well as state governments that have been hastily trying to introduce one reform measure after another without adequate and meaningful social dialogue. Unilateralism weakens the reform legitimacy and introduces “rigidity” in the reform process, a rigidity that is far more harmful than the presumed labour market rigidities that are said to exist due to tough labour institutions.

(Ramapriya is a Chennai-based lawyer and ShyamSundar is a professor at XLRI, Jamshedpur)