Provident Cut

Doctor Singh is back in business. That's the message to take from Monday's decision to effectively cut the rate of interest paid out on Employee Provident Fund (EPF) balances by one percentage point, in the face of stiff and vocal opposition from the Left parties and trade unions.

Incredibly enough, these want the rate of interest on EPF deposits jacked up to 12 per cent, which is higher than even most lending rates. Since the EPF's board of trustees met twice before, on June 30 and July 13, and was unable to come to a decision despite the obvious logic of the situation, it was clear that the Left and the unions had dug in their heels.

Indeed, since the signs till now""with regard to both privatisation and foreign investment""suggested the Left parties were extracting a huge price for their support to the Manmohan Singh-led UPA government, the final outcome remained unclear.

But from a month ago, when Dr Singh warned the trade unions that their demand for a higher interest could get the EPF to go the UTI way, the government's stand on the subject was equally clear, and the labour minister finally had to insist on what rationality demands.

While the timing of the decision is clearly unfortunate, given the recent spurt in inflation rates, what has to be kept in mind is that, at 8.5 per cent, the interest rate on provident funds remains the highest available on gilt-edged securities.

Indeed, as Labour Minister Sis Ram Ola announced, even an 8.5 per cent interest rate will leave a Rs 206-crore hole in the EPF's corpus. That is because all new flows into the EPF now have to be invested in securities that yield returns of around 6 per cent, since the government-run Special Deposit Scheme (SDS) was frozen a couple of years ago, and it offers an 8 per cent return on only old deposits.

Mr Ola has recommended that interest rates on the SDS be increased, but the finance minister is unlikely to oblige, and for good reason.

The government's work on the Employees Provident Fund Organisation (EPFO), however, has just begun since, as this newspaper has been arguing, the bigger problem is not the EPF but the EPS, or the Employees Pension Scheme, which guarantees a pension equal to half the member's last-drawn salary, subject to a ceiling.

Since this scheme was designed when interest rates were high, there's already a huge hole in the EPS corpus, and this can only get bigger as the scheme's coverage increases. Indeed, the government has got a pilot on for a pension scheme for unorganised sector workers, and that's even more under-funded than the EPS.

The fact that EPFO rules still do not allow the fund to sell bonds before their maturity date adds to the problem since EPF/EPS fund managers cannot sell bonds, like those of IFCI, even if they know they have near-junk status.

Given the enormity of the problem on these many fronts, the government should stick to its decision on lowering the EPF interest rate. Hopefully, the Left-organised protests will die down before long.