The Hindu Business Line : Whose interest?

THE DECISION OF the trustees of the Provident Fund Organisation to scale down the interest payable on member accumulations to 8.5 per cent should occasion no surprise. Their postponing a decision on the question for more than three months well indicated this. Clearly, this Labour Ministry-controlled organisation was hoping the Finance Ministry would set a higher rate of interest on special deposits than the 8 per cent it was willing to offer. But with these hopes belied, the PF interest rate has been cut. Of course, the PF board has sought to soften the sense of disappointment among workers in the organised sector by labelling it an interim declaration of interest. But it is difficult to see from where the Labour Minister, Mr Sis Ram Ola, would generate additional returns to enable declaration of a higher rate of interest. With nearly all the money locked up as special deposits, windfalls for the PF organisation can come only if there is a higher payout by the government. But it is a moot point if the Finance Ministry would be inclined to revise the estimate of the interest expenditure given the fiscal deficit implications.

But at the core of the dilemma confronting the PF trustees is the issue of interest rate offered by the government under the Special Deposit Scheme. The official thinking that triggered the downward adjustment in rates is the belief that the real interest offered on such deposits are unconscionably high. The 2001 Budget speech did make this point. Even assuming for a moment that this proposition was perfectly valid then, it fails now in the light of recent experience where there is a danger of real return turning negative if inflation goes above the 8 per cent mark. There still remains the other argument that the Government should not be called upon to pay a rate of interest that is higher than the current yield on its securities. No doubt, the Government has in the last three years been able to borrow at considerably lower rates than those credited on the special deposits with it. Equally, the Government had been crediting in the earlier years interest at rates that corresponded closely with that of yields on long-dated securities. But so benchmarking total accumulations exposes the PF investors to interest rate risks when the Government with its superior knowledge of the money-market should actually offer a stable rate of interest so that the retail investors are protected from annual volatility.

The argument acquires added merit when one considers that the present corpus of investment by way of `Special Deposits' with the government has accrued over a number of years and that in 17 of the last 20 years, long-dated government securities have yielded significantly higher returns than the 8 per cent now being offered. Clearly, the ball is in the Centre's court. It must come out with calculations to show workers that crediting of interest at 8 per cent on past accumulations would not be inferior to the returns they would have earned had they invested the accumulations in long-dated securities in those years. Else, the government runs the risk of being labelled as no different from petty money-lenders when it comes to framing one-sided contracts.

More Stories on : Editorial | Small Savings

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Whose interest?

What price truth if it does not hiss?

What a leaner law means

Rather than reservation in private sector
Make them entrepreneurs instead

Time's up

Defence spending and related issues — II: Stale paradigm, straddling structure

To win is to put rules back into the game

Add to your anti-fraud armour

Media glare

EPF rate