Reconfiguring pay: Cease and desist–economic times

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This newspaper reported on Tuesday that the new Code on Wages would bring about a significant change in how salaries are fixed and provident fund (PF) contributions determined: basic salary (including dearness allowance in the case of government employees) would have to be at least 50% of total pay.

This is a hare-brained idea if enforced on all salaries, without acap above which the rule would not apply. Forced saving would go up, disposable incomes shrink and individual freedom to plan investments badly eroded. This must be abandoned and the rule must be applied to low-income employees.

No employer is going to increase the cost-to-company (CTC) of any employee simply because the government wants to structure that remuneration in a particular way. CTC being the same, having a higher basic income would mean not just higher deductions for the employee’s contribution to the PF but also higher elements of employer’s contribution to the PF and funds set aside for gratuity payout. This means a significant reduction in the take-home pay. The ability of employees to spend on consumption and to plan their own investments would come down sharply. Consumption expenditure would be squeezed, taking some of the oomph out of economic revival. Mutual funds, insurance products, exchange-traded funds and other savings instruments would feel a significant dip in uptake.

Employees’ Provident Fund Organisation (EPFO) would have asignificantly larger corpus on hand, to invest in government bonds. Sure, the government would have a larger captive pool to borrow from, but employees who could make savvy investment on their own would end up handing over savings to the EPFO that struggles to get a decent rate of return on its investments.

This piece appeared as an editorial opinion in the print edition of The Economic Times.


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