The Hindu Business Line : Whose interest is it anyway?

If the interest rate on EPF deposits remains unchanged at the current 9.5 per cent per annum, the EPF Organisation would show a fresh deficit of around Rs 270 crore that would have to be covered through a subvention from the Union Budget. But if the rate is raised to 12 per cent, as many trade unions demand, the EPF would sink deeper into the red and require infusion of government funds upwards of Rs 2,000 crore.

THERE are strong indications that the Union Government will not lower the interest rate payable on deposits with the Employees Provident Fund (EPF) on account of pressure from labour unions. If the interest rate on EPF deposits remains unchanged at the current level of 9.5 per cent per annum, the EPF Organisation would show a fresh deficit of around Rs 270 crore that would have to be covered through a subvention from the Union Budget.

If, on the other hand, the interest rate is raised to 12 per cent, as has been demanded by a number of trade unions, the EPF would sink deeper into the red and require infusion of government funds upwards of Rs 2,000 crore. A sum of around Rs 1,000 crore has already been paid out of the coffers of the EPFO; this amount represents the difference between what was earned by the organisation and what it paid out to subscribers.

On his own, the Finance Minister, Mr P. Chidambaram — like his predecessor, Mr Jaswant Singh — would probably have liked the interest rate on EPF deposits to be lower by at least one percentage point, if not more — at, say, 8 per cent. But he would then provoke the ire of his Cabinet colleague, Labour Minister, Mr Sis Ram Ola, who — also like his predecessor, Mr Sahib Singh Verma — would like to uphold the interest (pun unintended) of some 30 million industrial workers who are members of the EPFO.

Most major trade unions, including the Centre for Indian Trade Unions (CITU) affiliated to the Communist Party of India (Marxist); the All India Trade Unions Congress (AITUC), affiliated to the Communist Party of India; and the Bharatiya Mazdoor Sangh (BMS), supported by the Rashtriya Sawyamsevak Sangh and the Bharatiya Janata Party, have demanded the rate of interest on EPF deposits should be raised to 12 per cent — the rate that prevailed in 2000.

The Indian National Congress-backed Indian National Trade Unions Congress (INTUC) has, however, not gone along with the other apex unions on this issue.

During a pre-Budget meeting with the Finance Minister on June 5 that was followed by a meeting with the Prime Minister, Dr Manmohan Singh, all the major trade unions barring the INTUC wanted a hike in the EPF interest. On no condition should the interest rate be lowered, the unions said. Whereas the INTUC was silent on the demand for a specific rate of return on EPF deposits, it wanted a relook at the EPFO's investment patterns so that its returns could be better aligned to returns on its investments.

The Central Board of Trustees of the EPFO, headed by the Labour Minister, is scheduled to meet on June 30 to decide whether or not to continue with the 9.5 per cent rate of interest. This would be the first meeting of the board after it was reconstituted. The decision of the board would first be deliberated upon by the Ministry of Finance, before a formal notification is issued by the Labour Ministry. The total value of the corpus of the three separate schemes operated by the EPFO — these are the provident fund, the pension fund, and the deposit linked insurance schemes — stood at Rs 1,68,000 crore at the end of March 2004. Of this amount, roughly Rs 1,06,000 crore is invested in the Special Deposit Scheme (SDS) in the Public Account and in securities issued by the Union government and different State governments.

The SDS was launched in 1975 to provide higher returns to non-government provident funds, superannuation funds and gratuity funds.

The SDS also acted as a parking lot for the surplus funds belonging to the Life Insurance Corporation and the Employees' State Insurance Scheme. The assured return on the funds in the SDS is 8 per cent per annum. The interest rate on deposits in the Public Account is 8.5 per cent. (The return on Public Provident Fund schemes and General Provident Fund schemes are even lower at around 8 per cent.) Labour union leaders like Mr W. R. Varadarajan, secretary, CITU, concede that the average yield on 84 per cent of the corpus funds with the EPFO is well below 8 per cent. He, however, argues that corpus funds lying with the EPFO should not be compared with term deposits parked with commercial banks.

Unlike deposits with banks that lie for specific periods, the funds with the EPFO are with the government "almost eternally". Hence, the CITU secretary claims that the interest rates on EPF deposits as well as any subsidy that the government provides should be treated as expenditure on the "social security" of workers.

One may or may not agree with the views of Mr Varadarajan, but it seems likely that the Centre will take his views seriously, especially as the Congress-led Government is dependent on Left support. Moreover, this government is keen on emphasising its pro-labour position. The contrary viewpoint would run as follows. In a situation where the Government is trying to lower interest rates and make them market determined, high deposit rates on certain schemes (in this case, the ones run by the EPFO) would create distortions.

Further, high interest rates on EPF deposits benefit only the organised working class that comprises barely 9 per cent of the total number of workers in the country. There is yet another argument against having a relatively high rate of interest on EPF funds.

Over two-thirds of the 30 million subscribers to the EPF schemes earn a monthly salary of barely Rs 4,000. In addition, this section of workers has depleted its balances on the EPF schemes due to early withdrawals. Thus, it can be contended that a higher rate of interest would help the better-off sections of workers who have subscribed to EPF schemes.

Interest rates are of considerable interest to businesspersons. Hardly a week goes by when some chamber of commerce does not urge the government and the Reserve Bank of India to bring down interest rates to spur growth. Industrialists in India — like their counterparts elsewhere — want to lower borrowing costs.

Yet, in the past, for many promoters, interest rates did not matter much simply because there was little or no inclination on their part to repay term loans borrowed from financial institutions or working capital loans obtained from commercial banks, most of them in the public sector.

Otherwise the country's financial system would not have been creaking under the overload of non-performing assets running to more than Rs 80,000 crore.

Compared to developed nations, a developing country like India would inevitably have relatively higher costs of capital (represented by interest rates), which is scarce in relation to labour (the costs being wage rates), which is available in plenty.

This logically results in local industry being at a competitive disadvantage vis-à-vis businesses abroad. Nevertheless, with inflation running at comparatively low levels, almost all interest rates in India have eased steadily and are currently at their lowest levels in the last three decades in nominal terms. Can this situation continue? Probably not, particularly with the US' Federal Reserve likely to hike interest rates by around 25 basis points or 0.25 per cent.

Despite the "soft" interest rate regime of the RBI, investments have taken their own sweet time picking up. In April and May this year, credit offtake by the corporate sector went up by nearly Rs 22,000 crore against a fall of over Rs 400 crore in the corresponding period of the previous year. This trend should hopefully continue. But the government's dilemma will not disappear in a hurry. One cannot hope to keep interest rates low to please industrialists and also hope to keep blue-collar workers and pensioners happy.

(The author, a journalist, is Director, School of Convergence, New Delhi. He can be contacted at paranjoy@yahoo.com.)

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