Who gets the PF?

Provident Fund (PF) is a form of Social Security in India. Employers and employees each contribute 12.5% of the Gross Income into this kitty, so that when the employee retires she gets the accumulated savings from her lifetime income. Casual labor is highly prevalent in India, especially in the construction industry where a good percent of the laborers are migrants who move across cities and states based on the demand. Until about 10 years ago, only salaried employees (aka those that get a pay-check once a month) were required to be enroled in the PF program. However, a decade ago, a new law was instituted (in the name of protecting contract labor) that made it mandatory for employers to start PF for casual labor as well. This is a ridiculous policy, since these employees do not have any permanent address, they are mostly illiterate and do not have bank accounts (PF funds are deposited only in bank accounts by the government at the time of maturity). Neither the laborers nor the contractors were happy with this situation and the contractors challenged the law in the courts. After 10 years of fighting, they lost. The contractors' argument (a very valid one) is that there was no way for them to track down these individuals to give them their PF when they retire. They asked the government to put in place a system to give these funds out and promised to contribute to PF once the system was in place. The government's answer.. "It is not your problem how the PF is given away. Your problem ends with depositing the funds with the government".

Of course to us economists it is obvious that these are enormous rents. Here's another twist to the story. The laborers do not care for the PF, all they care about is their money. So they have made it very clear to the employers that if their income is Rs.100, that is what they should get, not a penny less. So, the employers are doling out the entire 25% of the PF into the government kitty, and employing fewer contract labor. In addition, they create bogus employee records with the names of their current employees' family members, open accounts in their name, wait a coupla years, terminate the employee and get the money back.

What a shame and what a waste of entrepreneurial talent!!