The Hindu Business Line : The PF imbroglio

THE PRIME MINISTER has said categorically that the Government will not come to the rescue of the Employee Provident Fund Organisation, even as vociferous demands aremade for a hike in the payout on subscriber deposits. It remains to be seen if the Prime Minister's economic beliefs outweigh his political compulsions and he stands firm on his stated position in the face of some determined opposition from the Left. Considering the stakes involved for both the parties, one can safely say that this is not an issue on which either the ruling alliance nor the Left would allow the stability of the Government to be undermined. Some compromise will most surely be struck.

Yet, the Left has not really helped its cause in offering the kind of suggestions that it made in the debate leading up to the present stalemate. For instance, there has been the talk of a hike in the Statutory Liquidity Ratio — the proportion of deposit monies that banks must invest in government securities — as a way out of the Government's fiscal dilemma. A hike in this ratio, all other things remaining constant, should raise the yield on government securities creating the condition for the Government to increase the interest rate on the special deposit of PF monies lying with itself, and the EPFO too would be in a position to raise the interest rate on its members' balances.

While this looks elegant on paper, it is fraught with messy fiscal and monetary complications. The proposal is certain to make the cost of funds in the economy as a whole that much dearer and could stifle growth impulses in the economy. We need go no further back than 1997, when a hardening of the interest rate regime pushed the economy into a prolonged spell of stagnation from which it could recover only in 2003-04. True, there were other factors contributing to the recessionary phase then, such as the capital market and NBFC scams which eroded investor confidence, or the corporate profligacy in capital expenditure that led to a situation of excess capacities across many sectors, and so on. But the contribution of a policy-induced hardening of interest rates cannot be minimised. Quite apart from its implications from a growth perspective, the proposal is also certain to push the level of deficit in government spending to a higher level.

Given the historical compulsions and the nature of the current political dispensation, the Government faces the daunting prospect of satisfying investor expectations on provident fund performance. But any decision on this also carries with it the moral dilemma of diverting scarce resources to the better off sections in society. But underlying this predicament is the phenomenon of the Government virtually taking over the responsibility of asset management of long-term savings of a significant section of the public. Inherent in the situation is an element of conflict of interest. The government is the principal borrower from a fund that it manages and yet is also responsible for the fund's performance as it is the manager of these assets as well. The compulsions of alliance politics are adding to the already deadly concoction.

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