Impact of ESIC’s Increased Benefits on Industries and Companies
Analysis for Layman
The Employees’ State Insurance Corporation (ESIC) has recently announced an increase in two key benefits – the Permanent Disablement Benefit (PDB) and the Dependant’s Benefit (DB). ESIC manages social security and health insurance for formal sector employees in India who earn less than Rs 21,000 per month.
The PDB provides monthly income replacement for insured individuals who lose their earning capacity due to job-related injuries or diseases. The DB offers monthly payments to dependents of insured workers who pass away due to such causes.
Both benefits will now be calculated based on 90% of the worker’s wages, which is an increase from the previous levels. This change aims to help individuals and their families cope with the effects of inflation, allowing them to maintain their standard of living even after the loss of livelihood.
Impact on Retail Investors
This policy change primarily focuses on safeguarding the interests of formal sector employees and their dependents, rather than having direct implications for retail investors. However, there could be some indirect effects. With increased income security, low and middle-income families may have more discretionary savings to potentially invest. This could lead to a gradual expansion of India’s retail investor base.
Furthermore, companies listed in sectors that predominantly employ ESIC-covered workers might experience minor cost increases as they are required to contribute higher premiums for the expanded benefits. These sectors include construction, textiles, metals, and certain manufacturers. Investors should monitor if this impacts profit margins or if companies absorb the added expenses.
Overall, this policy change aims to stimulate social welfare and enhance consumer spending power. From an investor’s perspective, it signals the government’s ongoing efforts to support vulnerable groups, especially in the face of high inflation.
Impact on Industries
Sectors that employ a significant number of ESIC-insured workers will see an increase in mandated contributions toward the expanded PDB and DB programs. These increased costs may slightly squeeze profit margins in these sectors.
Examples of such industries include construction, textiles, metals, capital goods, chemicals, gems and jewellery, handicrafts, non-electrical machinery, and food production. In the future, these sectors are likely to lobby for tax reductions or subsidies to offset the additional expenses.
The healthcare sector is also affected by this change. It will lead to higher utilization and costs for ESIC’s medical infrastructure, which provides care for insured individuals with employment-related injuries and illnesses. This infrastructure includes a network of hospitals and dispensaries across India. Consequently, the government plans to establish nine more ESIC hospitals and 17 dispensaries to expand capacity.
Overall, however, the policy change is intended to benefit industries that rely on low and middle-income workforces. The income replacement provided in cases of disability or death is expected to improve employee retention, productivity, and spending power.
Long-Term Benefits & Negatives
In the long term, this policy change is overwhelmingly positive across the socioeconomic spectrum. For workers, higher PDB and DB rates directly combat the erosion of real incomes caused by high inflation. This prevents scenarios where families fall into poverty after losing their primary breadwinner, providing essential income security.
Moreover, guaranteed coverage encourages higher domestic consumption and savings rather than precautionary thrift. Workers can confidently participate in India’s economic growth.
For employers and industries, the policy change brings benefits in terms of retention and productivity, as discussed earlier. Healthy and financially secure workers are essential for long-term development.
However, the mandated increase in contribution costs could encourage automation and reduced labor intensity for some low-margin employers. This technological disruption could initially worsen structural unemployment. But when balanced with retraining programs, it should ultimately support industrial growth.
In summary, this pro-labor reform aids incomes, welfare, structural changes, consumption, and capital market participation, with little long-term downside apart from transition costs.
Short-Term Benefits & Negatives
Over the next 6-12 months, the hike in PDB and DB values will provide an immediate boost to low and middle-income groups covered under ESIC. With inflation surpassing 6%, this increased income replacement helps counter rising prices for essential goods and services.
Given marginal savings rates, the additional payouts from ESIC are likely to be quickly spent or used to pay down high-cost debt. This provides a short-term boost to both overall consumption and consumer sentiment.
However, for industries employing a large organized labor force, cost pressures may temporarily dent margins until output prices can be adjusted or discussions with policymakers yield results. As mentioned earlier, construction, textiles, and low-cost manufacturing are among the sectors that will lobby the government, arguing that they cannot absorb the sharp rise in mandated contributions.
This could lead to worker retrenchment or act as a brake on employment generation, offsetting some of the beneficial impact on consumption and welfare. The government will need to strike the right balance, providing support to labor without fully transferring the costs to the industry.
Companies That Could Gain
ITC: ITC produces affordable FMCG (Fast-Moving Consumer Goods) products frequently purchased by low and middle-income segments. Higher spending capacity directly aids domestic sales.
Marico: Marico is another mass-segment FMCG firm that manufactures everyday products like hair oils, tea, and cosmetics, whose demand is expected to rise.
Titan Company: Titan is a leading jewelry and watch retailer with a presence in small towns and rural areas. Wage growth feeds into more discretionary purchases.
Asian Paints: Asian Paints stands to benefit from increased incomes and government welfare spending in the construction and housing sector.
Pidilite Industries: Pidilite Industries benefits from the demand for DIY and home improvement products due to a more secure and financially stable workforce.
In general, companies providing everyday affordable consumer goods and services, as well as those geared towards second-tier incomes and discretionary spending, are expected to benefit from this announcement. This advantage could persist over the longer term as strengthening social security boosts structural consumption.
Companies That Could Lose
Companies facing margin pressures or slowdowns due to higher ESIC contribution costs include:
GMR Infrastructure: GMR Infrastructure is a major airport and infrastructure builder that employs a large construction workforce. Higher input costs from the ESIC hike may impact competitiveness for government projects.
NBCC India: NBCC India is similar to GMR, as it undertakes large public works contracting and faces inflation in labor overheads, affecting execution pace and bidding viability.
Trent Ltd: Trent Ltd is a major retailer where rising costs of the frontline workforce may temporarily dent profitability until offset by a higher revenue base over the longer term due to formalization.
Indian Hotels Co.: Indian Hotels Co. (Taj Hotels) is Tata group’s flagship hospitality firm. Personnel expenses account for a larger share of operating costs, so margins may be hit. The ability to pass on higher costs to room tariffs remains limited in the short term.
In general, most labor-intensive sectors like textiles, gems and jewelry, metals, chemicals, and construction face cost pressures that could impact profitability and, consequently, investor returns until compensatory mechanisms take effect. However, the overall direction of the policy change should support long-term formalization.
Proper citation: ET Bureau. “ESIC Raises Benefits under Disability and Dependent Schemes.” The Economic Times, 16 Dec. 2023, Link.