India needs to create a large number of formal sector jobs and deal with regulatory issues that force firms to opt for contract workers due to slow labour reforms, Economic Survey said today.

The pre-budget document also suggested that formal sector workers should be given a choice of not investing in social security schemes run by retirement fund body EPFO as it would reduce the cost of hiring and incentivise more people into formality (formal sector jobs).

“The employer’s 12 per cent contribution to EPF/EPS would be unaffected. The only difference would be that employees could choose whether or not to save 12 per cent of their salary into EPF or keep it as take home pay,” it said.

“Such a change would effectively reduce the tax on formal sector labour while leaving informal sector labour costs unchanged. In a relative sense, it would therefore reduce the cost of hiring workers in the formal sector and incentivise more people into formality, where productivity levels and growth are higher,” it added.

Good jobs

The Survey also suggested that India’s most pressing labour market challenge going forward will be to generate a large number of good jobs which tend to be in formal sector.

However, it said: “Two obstacles to formal sector job creation are regulation-induced taxes on formal workers (like EPF contributions) and spatial mismatch between workers and jobs.”

It stated that encouragingly, firms and workers are finding solutions to deal with these obstacles that are even more varied than the obstacles themselves.

According to it, the slow pace of labour reform has encouraged firms to resort to other strategies to negotiate the “regulatory cholesterol”.

One popular strategy is to hire contract workers, which has two key benefits. Firstly, the firm essentially subcontracts the work following regulations and “managing” inspectors to the contract labour firm.

Secondly, it said, because contract workers are the employees of the contractor and are not considered workmen in the firm, the firm stays small enough to be exempt from some labour law. Contract workers increased from 12 per cent of all registered manufacturing workers in 1999 to over 25 per cent in 2010.

The document also pointed out that several States, such as Rajasthan, have responded by amending their labour laws with the goal of attracting large employers and high growth industries to their State, and other States like Gujarat and Maharashtra are considering steps in this direction. It said that with private investment lagging, States are under pressure to be seen as attractive destinations for investments that will create jobs and boost economic growth.

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