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<b>Editorial:</b> Expand, but also improve

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Business Standard New Delhi
Last Updated : Jan 29 2013 | 1:34 AM IST

A second set of reforms must encompass a more competitive framework, and bring to an end the government monopoly that has led to today's unsatisfactory service levels. Those who may be asked to contribute to a provident fund must be given a choice of funds, since the country now has no shortage of fund managers and asset management companies, almost all of which probably have better investment skills than the government-run PF organisation. Competition will also reduce overheads, and proper supervision by a regulator (perhaps one of the existing ones) as well as the laying down of investment norms that give primacy to the protection of capital will create the superstructure for a competitive environment.

The third reform, which is even more urgent than the others, is to introduce for PF balances an inflation-linked and market-linked interest rate which then gets fixed automatically, without the intervention of trade union leaders, politicians and others who usually choose to ignore simple financial rules. The demand is being made today that PF interest rates should be raised from 8.5 per cent to 12 per cent, so that it is more than the inflation rate. However, the same people who demand this would not accept earlier that interest rates should drop in line with the fall in the inflation rate (which at this time last year was barely 4.5 per cent, yielding an inflation-adjusted "real" interest rate of an outsize 4 per cent for PF depositors). It is logical that today's rates should be raised, at a time when interest rates are going up across the board, and it is equally logical that long-term money such as PF contributions should yield a positive, inflation-adjusted return. However, it is also true that 10-year government bonds attract a return that is less than the current rate of inflation. So if the PF organisation is to pay more than that, how is it to earn the money so that it does not go bankrupt? The answer would be to evolve a formula that is linked to inflation and to market yields, so that the interest rate applicable to PF money gets adjusted periodically, without it needing external intervention.

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First Published: Jul 07 2008 | 12:00 AM IST

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