The Hindu : The Provident Fund dilemma

Online edition of India's National Newspaper
Thursday, Jun 05, 2003

Opinion

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The Provident Fund dilemma

AFTER CONSIDERABLE DELIBERATIONS and delay, the trustees of the Employees Provident Fund Organisation (EPFO) have announced a rate of 9 per cent for the current year on the provident fund account balances of the largely non - government employees of the EPF scheme. That should normally have been a routine decision, exercised in pursuance of their statutory duties. Again, the purport of that decision, even though it concerns a large proportion of the organised sector, need not have a general significance. Yet, for a variety of reasons the circumstances this year have been such that no decision regarding the interest rate, however diligently exercised, could have escaped controversy. First, the yield of 9 per cent appears to have been pegged artificially high in relation to the general interest rate scenario. Following significant, sustained declines, interest rates have markedly declined in the country. Most of the market-determined interest rates, typically those in the domain of the banking system, have come down sharply and are now at historic lows. Even those interest rates that are administered, the savings bank rate (of banks) and those paid on the several savings schemes of the National Savings Organisation and the post office, have already been brought down, albeit amidst plenty of rancour on the part of those immediately affected.

The latest decision of the EPF authorities, therefore, goes against the trend of falling interest rates but that is not the only ground on which it is faulted. The authorities are inviting further criticism by adding a "golden jubilee" bonus of 0.5 per cent to the 9 per cent annual rate. Even granted that this would be a one-time affair — the EPFO is celebrating its 50th year — the feeling is inescapable that the Government has brought to bear its considerable influence on the organisation and persuaded it to pay at the same rate as in the previous years. The EPF's rate is a good 1.5 per cent higher than that accruing to the General Provident Fund Scheme (applicable to the government sector). Even the once attractive Public Provident Fund Scheme (PPF) has lost much of its lustre, partly through a downward revision in its yield structure. It is going to be extremely difficult to justify the abnormal yield promised on the EPF and blunt the obvious criticism that it has been prompted more by political considerations. Although the Union Labour Minister has tried to justify the decision from a purely economic standpoint — according to him, there would still be a surplus of Rs. 25 crores — there is every reason to think that a promised yield of that magnitude is simply unsustainable and imprudent in the declining interest rate scenario. Moreover, the Government seems to have taken credit for a large amount of receivables (Rs. 130 crores), not previously accounted for, to determine the high yield. The bonus is to be paid from out of the contingency fund. Those moves raise doubts on the quality of book-keeping: provident fund schemes, as a rule, will have to be managed far more conservatively than what the recent reports on the EPFO suggest.

Beyond the above specific points of criticism lie the more general arguments of artificially pegged yields (such as on EPF) doing harm to the macro economy. Many of those have been voiced before and were convincing enough to bring down most of the other administered interest rates. Two points, however, need special mention. The debate over the utility of lower interest rates to the macro economy is hardly conclusive. There has been, for instance, very little evidence to link the general decline in interest rates over the recent past with even the modest industrial recovery now under way. Second, provident fund, pension funds and other long-period savings ought not to be judged by strict economic parameters alone. Schemes such as these have a social security implication and outside the government sector have not yet evolved to any meaningful extent. It will be in everyone's interest if there is a convergence of economic and social objectives, on the one hand, and of short-term and long-range goals, on the other.

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