Photo: Ramesh Pathania/Mint (Ramesh Pathania/Mint)
Photo: Ramesh Pathania/Mint (Ramesh Pathania/Mint)

Why provident fund means trouble for the government

Both opposition political parties and trade unions have realized that if there is any change in policy related to EPF, it becomes easier to convince workers to protest

New Delhi: In the past 45 days, the National Democratic Alliance (NDA) government has made a U-turn on issues related to employees provident fund (EPF) because of protests by millions of EPF subscribers. First, it was the withdrawal of EPF tax as proposed in the Budget 2016-17 and now the cancellation of EPF withdrawal restrictions until retirement imposed by the union labour ministry in February.

Here are five reasons why EPF, termed as a black hole by many of its own subscribers and experts until the last few years, is attracting so much attention and why the government is being forced to listen to EPF members.

1) Mandatory deductions:

EPF is a mandatory deduction from organized sector workers salary – 12% contributed by a worker from his basic salary and a matching contribution by his or her employer. With changing times, many employers have made their EPF contribution as part of the employees cost to company leading to a mandatory 24% outgo of basic salary to EPF Organization as retirement savings. A mandatory saving locked in for 30-35 years (assuming that one has started work in mid 20s) puts EPF at somewhat disadvantage against other long-term saving products.

2) Low Wage:

India’s salary structure at least for a bulk of its organized sector employees is very low. As per a 1 March statement issued by finance ministry, of the 37 million active EPF subscribers, some 30 million are getting salary up to 15,000 a month. For example, a four member family depending on 15,000 a month has 125 each per day to survive.

To be sure, this 15,000 is not the salary of all 30 million people as the minimum wage across India varies from around 4,500 onwards.

Taking away a sizable portion of these workers salary as mandatory PF deductions creates resentment. “The narrative that the huge gap between gross and net salary is toxic is hardly unfounded or unfair," Manish Sabhrawal, chairman of the staffing company TeamLease Services wrote in an opinion piece in business newspaper Financial Express on 20 February.

Authorities in the labour ministry believe that it is good from a retirement savings point of view but workers especially in the lower salary bracket have reservations and believe that the present take-home salary is more important for them than saving for old age.

3) Sizable Corpus:

EPF Organization or EPFO manages a retirement saving corpus of over 8.5 trillion and in last couple of years this figure has been highlighted by the EPFO, labour ministry and the union government attracting attention to itself.

To put it in perspective, the EPFO managed corpus is almost equal to the market cap of four blue chip companies of India – Infosys Ltd, HDFC Bank Ltd, State Bank of India and ICICI Bank.

4) Improved Service:

Though the service is still far from being smooth like a bank or similar financial institutions, in the last couple of years, EPFO has improved its image. The adoption of technology has improved user interface. The PF number portability through a universal account number has helped tens of thousands workers to consolidate their multiple EPF accounts though niggling issues keep surfacing for the retirement fund body.

An improved service has improved subscribers engagement – from not knowing what’s going on, subscribers are now getting their EPF pass book on their mobile phone or laptop. And any attempt to restrict the access to their savings or its withdrawal is leading to backlash.

5) Political tool:

Both opposition political parties and trade unions have realized that if there is any change in policy related to EPF, it becomes easier to convince workers to protest. “The middle class was considered a key constituent of the ruling NDA government but ever since they are back in power – poor and middle class workers are on the receiving end of government policies. The protest against EPF rules is just a specimen," argued D.L. Sachdeva, national secretary of the All India Trade Union Congress, a central trade union.

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