EPF flip-flops

Labour unions will undoubtedly claim victory for forcing the Centre to go back on its decision to reduce the interest rate on Employee Provident Fund (EPF) deposits to 8.7 per cent. Faced with concerted protests, and stiff opposition to the move even from the Ministry of Labour, the Finance Ministry has agreed to stick to the Labour Ministry-recommended rate of 8.8 per cent for 2015-16. This marks the third roll-back of reform measures in as many weeks on the EPF front. Earlier, a Budget decision to tax EPF withdrawals was withdrawn, followed by the roll-back of a notification placing restrictions on premature withdrawals. Given the widespread public resentment against the proposed measures, and the rapidity with which the Centre has caved in, EPF is on its way to becoming one of the ‘untouchables’ of policy reforms, like reservations.

It will be a great pity if that happens. The EPF is in urgent need of reforms. Given the near-total absence of any kind of social security in India, provident funds and pensions are virtually the only means by which a vast majority of ordinary Indians can secure their old age. Ensuring such security should be the first — indeed the only — focus of policy measures. Instead, both the Centre and the unions have looked only at short-term fall-outs. There is an urgent need for reforming the EPF. The EPFO’s ‘surpluses’, on which it relies to pay interest to subscribers, are less due to efficient investments and more due to an inefficient and opaque system which has resulted in vast numbers of inoperative accounts and unclaimed funds. There is also a need to provide parity between various pension products. For instance, while the roll-backs will benefit organised sector employees, others, who constitute the larger part of the workforce, and have only the Public Provident Fund (PPF) or the National Pension Scheme (NPS) as options, will perforce miss out. This not only disincentivises the PPF and the NPS, but also works against the longer term interests of even EPF beneficiaries.

The developments underscore the need to build consensus and engage with all stakeholders on reforms, particularly as the Centre attempts more ‘difficult’ structural reform. Unless it is able to adequately demonstrate the benefits of reforms — to all stakeholders, not just a privileged few — it will be impossible to move ahead. For instance, there was nothing inherently wrong or illogical in what the Centre attempted to do with the EPF; it only failed to sell its point of view effectively. That would have been only possible if issues had been discussed in a transparent manner and resolution sought through discussion and collaboration. The time for reforms by decree is long past.

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