Advisory Board member, Manish Sabharwal writes in this World Bank blog that changing the ways that India’s benefits regimes are funded would be the most impactful way to reform the country’s labour market.

"When people think of labour law reform in India they tend to think of the laws around hiring and firing; specifically, reforming Chapter 5B of the Industrial Disputes Act...

I would also argue that the most impactful labour law reform would be fixing our benefits regime. Under this regime, the mandatory deductions to gross wages are 45% for an employee with a Rs5500 monthly salary but only 5% for an employee on a Rs55,000 monthly salary. Making matters worse, this 45% deduction from low wages goes to programmes that give poor value for money; 55 million of 100 million Employees’ Provident Fund of India (EPFO) accounts are dormant. 

I would propose the following reforms, which would create three choices for employees in how their salary is paid: