The Hindu Business Line : EPF mismatch

THE FINANCE MINISTRY'S ratification of the interest rate payable to Employee Provident Fund subscribers for 2002-03 and 03-04 on their accumulations should end the long uncertainty on transactions involving past accumulations. It is a matter of some regret that retiring employees have not, in recent times, been able to get their accounts settled in full or that serving employees wanting a non-refundable loan have not been able to get their maximum entitlement.

But far more than this, the delay serves to underscore the difficult choice before the Government. While, on the one hand, it has had to contend with strong expectations within the community of employees in the organised sector that the annual interest rate of 9.5 per cent, currently in force, will be maintained, there is also the issue of the fund's investment performance, which has fallen short of the required rate. Though the extent of the deficit in these two years may have been but marginal, it must be painfully aware of the fact that conceding to the demand could well give rise to a rising clamour for a Government subsidy to fund the crediting of a sum of interest on members' balances that is far higher than what its performance warrants and can sustain. It is difficult to see how the Finance Ministry could resist the demand for an interest rate of 9.5 per cent for fiscal 2004-05 after having conceded the same for the two earlier years. As it happens, the deficit for 2004-05 on the present interest rate of 9.5 per cent has been assessed at close to Rs 1,000 crore and there does not seem to be any realistic prospect of either the provident fund trust finding the needed additional resources or the Union Budget making a provision for supporting a higher outlay by the PF Trust. With the interest rate environment hardening and the bulk of the investible funds locked into instruments offering lower rates of returns than the present 9.5 per cent, it will be even harder for the Government to manage public expectations in the coming year.

The Government clearly finds itself in a predicament. It has to satisfy investor expectations on fund performance. But this carries with it the moral dilemma of diverting scarce resources (for securing higher returns) for the benefit of those in the organised sector when there is extreme deprivation elsewhere. It has taken upon itself the primary responsibility of asset management on behalf of provident fund subscribers. The fact that it is also the principal borrower from the fund creates a situation fraught with conflicts of interest between its twin roles as borrower and manager of long-term public savings. The time has come for the Government to move out of asset management by encouraging more employers to set up their own asset management outfits and, where they are not confident of doing so, an independent regulatory authority constituted by the Government can license private asset managers. The Government should concentrate only on the larger policy framework for long-term savings and leave the task of asset management to those better qualified to do so.

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