New EPFO data shows 15% formalisation rate

The EPFO data is a step ahead of the US payroll counterpart that gives out numbers only according to industry and not states

In April 2018, the government released the first monthly payroll data from September 2017 to February 2018 as per the records of the EPFO, NPS and ESIC. This was based on the recommendation given by a Ghosh & Ghosh study, titled, "Towards Payroll Reporting in India". Continuing the trend, all the three agencies have now released data for the second month in succession (March 2018). Hopefully, this will become a monthly feature.

As per EPFO data, the total net new payrolls created for the period of September 2017 to March 2018 was 3.9 million. NPS contributed on an average 65,000 new payrolls per month. The ESIC data is difficult to interpret as it is still evolving, still not fully Aadhaarlinked and has overlaps with EPFO. In principle, EPFO is synonymous with opening of a unique bank account, and hence is easy to measure. In contrast, ESIC being an insurance-based scheme is a cost on the employer and is primarily driven by the risk perception and hence may still be discretionary. Thus, there are more chances of exits as well as entries. Nevertheless, we believe that the stock of active contributors to ESIC could give us an idea of new payrolls created, but over a point of time.

Coming back to the EPFO data, the new data gives a clear idea of the extent of formalisation in the economy. One of the constructive criticisms of the EPFO data is that not all payrolls are new and some are existing. In principle, an organisation having more than 20 employees in any year and migrating from less than 20 jobs will count all these jobs as new, and to that extent EPFO payroll data is only a rehash of existing jobs.

The ECR (electronic challan cum return) data published by the EPFO for the first time gives us a clear idea of the extent of such formalisation happening in the economy. As per the data, a total 28,627 establishments remitted their first ECR during the September 2017 to March 2018 period. This number is the proxy for existing organisations that migrated from less than 20 jobs. Thus, when we multiply the number of organisations with the EPFO cut-off or 20, this gives us the total payroll due to formalisation. This comes to 0.58 million. Hence, the new employment (excluding formalisation) during September to March 18 is 3.36 million (3. 9 million net of 0.58 million). This give us average formalisation of around 15 per cent. However, if we exclude the ECR numbers of February 2018 and March 2018 (as these numbers are provisional), the formalisation ratio is higher, at 18 per cent. Even for the sake of argument, we put this formalisation rate at 20 per cent, the new payroll still counts at 3.15 million.

This effectively puts to rest the fallacy of the continued debate of EPFO of not being an employment data, and merely a reflection of formalisation.

The EPFO data has also provided the data individually for states and industries. This is in line with best practices worldwide, or in fact a step ahead of the US payroll data that gives out data only according to industry and not according to states. The state-wise data shows that the top 10 states account for 85 per cent of the new payrolls created, after adjusting for formalisation. The good thing is, apart from Maharashtra, states like West Bengal, Karnataka, Uttar Pradesh and Rajasthan etc. are now in the top 10. This is a welcome trend, as it indicates a broad-based payroll creation, pan-India.

An industry-wise analysis throws up some interesting facts. Expert services comprises 50 per cent to the total new payrolls followed by the building and construction industry at 8 per cent. The top 10 industries again encompasses 84 per cent of the total new payrolls. Textiles and garment-making constitute 5 per cent of the share, indicating that the industry is coming on steam after the initial hiccups following GST. Given the employment elasticity of construction and textiles, this is indeed a welcome trend.

There are also misleading data interpretations in the public domain regarding the EPFO data. One of them is, the cut-off for EPFO registration is now at 10. This is pure ignorance, as this proposal is yet to be approved, just like the proposal to increase the EPFO eligibility criteria to ~21,000.

There has also been debates in the public domain on the disproportionate share of EPFO in those seeking employment and the EPFO total employment stock. As the table below shows, using an employment ratio of 54 per cent on 25 million babies that are born every year, the total number of people seeking employment is at 13.3 million. If we strictly take the payroll in 18-25 age band net of formalisation, this is 3.3 million, 25 per cent of those seeking employment. In contrast, if we take the share of the active EPFO subscriber base at 60 million and compare it with the NSSO employment stock of 480 million (2012), it is at 12.5 per cent, not widely different from 25 per cent. We believe increased share of EPFO may be due to the better formalisation of jobs and the number of registered companies going up.

In summary, the payroll data has ushered in a new beginning. As a follow up, we should move towards expanding the data set further. Thus, the Labour Bureau should get quarterly data about professional firms or quarterly estimates based on their professional bodies. The Labour Bureau should also estimate employment in the informal sector, small enterprises below 20/10 by an estimation method every quarter to give a full quarterly report. We must build on the new beginning to further the cause for real time job research.