Economics

What does ESI rate cut mean?

In News:

  • Recently the government has announced a cut in contributions made by employers and employees toward the health insurance scheme of Employees’ State Insurance Corporation (ESIC) to 4 per cent from the existing 6.5 per cent.

 

About Employees’ State Insurance Act 1948

  • The Employees’ State Insurance Act 1948 (the ESI Act) provides for medical, cash, maternity, disability and dependent benefits to the insured persons under the Act.
  • The ESI Act is administered by Employees’ State Insurance Corporation (ESIC) (an autonomous body).
  • Under the ESI Act, employers and employees both contribute their shares respectively.
  • The government of India through ministry of labour and employment decides the rate of contribution under the ESI Act.
  • The ESI Act applies to premises where 10 or more persons are employed. Employees with wages up to Rs 21,000 a month (earlier Rs 15,000 per month) are entitled to the health insurance cover and other benefits under the ESI Act.

ESIC-2.0

  • As part of its second-generation reforms ESIC-2.0, the ESI Corporation decided to implement the ESI scheme all over the country.
  • Accordingly, the ESI Scheme is now being fully implemented in 346 districts and 95 district headquarters areas, and partially in 85 districts.
  • There are 154 ESI hospitals in the country that are being run by ESIC and by the respective state governments.

News Summary:

  • The revised contribution of 4% comprises the employers’ contribution of 3.25% of the employees’ wages (reduced from 4.75%), and the employees’ contribution of 0.75% (reduced from 1.75%).
  • The reduced rates will be effective from July 1, 2019 and would benefit 3.6 crore employees and 12.85 lakh employers

Benefits:

  • This move would lead to an estimated annual saving of around Rs 5,000 crore for firms.
  • Reduction in the share of employers’ contribution will reduce the financial liability of the establishments leading to improved viability of these establishments.
  • It would bring in a substantial relief to workers and facilitate further enrollment of workers under the Employees’ State Insurance (ESIC) scheme and bring more and more workforce into the formal sector.
  • This shall lead to enhanced Ease of Doing Business
  • It shall also lead to improved compliance of law.

Criticism of the move:

  • Instead of reducing the rate of contribution, more benefits should be planned under the health insurance scheme and a practice of inspections should be restored to ensure compliance.
  • It will be more beneficial for employers than employees as employers’ obligation being reduced by 1.5% and that of workers by only 1%, which would lead to huge benefits/savings of the employers to the tune of estimated Rs 8,000-Rs 10,000 crore.
  • It is being considered as a violation of the 175th Tripartite Governing Body meeting of the ESI held in 2018, where it was unanimously decided that the employers’ contribution to ESI would be reduced to 4% of enrolled workers’ wages from 4.75%, and the employees’ contribution to 1% from 1.75%.This would have brought the total ESI contribution to 5% annually, instead of 4% as announced.

 

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