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Why insurance against job loss is necessary

November 20, 2008

With lakhs of people losing their jobs, primarily in the country's labour-intensive exports sectors, and several lakh likely to follow them through the exit door, the subject of unemployment insurance has gained a new urgency.

All the actions by the government so far have been focused on helping employers deal with the fallout of the financial crisis, including easier terms of credit and higher tax rebates, but these are unlikely to achieve much in an environment where one major economy after the other has slipped into recession, and in which global demand has shrunk as a consequence -- with a recovery still beyond the horizon. Higher duty drawbacks on exports of cotton shirts, for instance, may make it more profitable to export, but if no one is buying, little is achieved.

Extending the National Rural Employment Guarantee Act is another obvious solution, but the job losses are primarily in urban areas, and many of the industrial unemployed will be unwilling to pick up a shovel and start moving earth, in return for Rs 60 per day. In short, there is no good substitute for unemployment insurance, which is neither expensive nor difficult to give effect to if there is determination to get the job done.

If those rendered unemployed are to be given the NREG equivalent of Rs 60 per day for say, 300 days in a year, it works out to an annual payment of Rs 18,000. For every lakh persons rendered unemployed for the full year, this means an outflow of Rs 180 crore. Bring in the actuarial probability of this happening in each industry, divide the premium over the large work force, and the scheme could even be self-financing.

If that proves to be a stretch, the government could offer to make a matching contribution, so that the sum available for distribution doubles. If one assumes 5 per cent frictional unemployment at any given point of time (the total figure, according to the official statistics, is about 7 per cent), a monthly contribution of Rs 15 by an employed person, matched by a similar contribution by the government, should be able to do the trick. And since Rs 60 will not be enough for all income categories, the unemployment dole can vary with the rate of contribution that a person has been making, with a cap designed to ensure that people do not lose the incentive to look for work.

When it comes to operational issues, there will be large databases to deal with, but since agricultural workers will necessarily have to be kept out of the scheme's purview (they are supposed to benefit from the NREG programme), the total numbers should not be unmanageable. After all, companies like Tata Consultancy Services [Get Quote] have shown that they have the ability to handle the task without difficulty.

The key to the success of the programme will be proper implementation, with accurate data bases so that the kind of problems that have bedeviled the NREG programme do not recur. Since the scheme is to be funded by its potential beneficiaries, there is an automatic insurance against fraudulent lists in the database, but that does not mean there is no risk at all. Also, the risk of misuse gets minimised if the level of the dole is kept reasonable, with a phasing out of the benefit every quarter, and a sunset date (which could provide for payment for a maximum period of one year) so that no dole can be paid out in perpetuity.

Safeguards will need to be built in, so that people who find work cannot continue to claim the dole -- a real danger since the likely beneficiaries will be overwhelmingly from the unorganised sector. A properly functioning employment exchange, or some other suitable mechanism, may be needed.

Also, the scheme and the premia need to be dispassionately assessed by actuaries to avoid the gaping hole (upwards of Rs 20,000 crore or Rs 200 billion) currently being seen in the Employees Pension Scheme on account of poor actuarial work.

Similarly, without an IT system (the scheme could be tied in with others that already involve biometric cards), the scheme will be a non-starter. Such a dole will not play any role in helping workers caught in the current crisis, but it will be invaluable in the years to come.



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