Another warning beep

The finance ministry has indicated that it will not bail out the Employees Provident Fund Organisation EPFO to pay for the 9.5 per cent interest rate announced on Employees Provident Fund EPF by Finance Minister P. Chidambaram last month. This is as it should be. However, it raises a number of pertinent questions. The interest rate of 9.5 percent is higher than what the EPFO earned in 2004-05. Income and interest payment liabilities suggest that paying 9.5 per cent will involve a deficit of Rs 927 crore. Interestingly, the EPF Act does not allow it to pay out more than it earns.

The question therefore is: if a direct subsidy will not be given, how would the higher rate be paid? One way to pay higher interest would be if the FM raised the interest rate on the Special Deposit Scheme SDS. In Budget 8217;05, Chidambaram kept the interest rate on SDS in which the EPF holds about 80 per cent of the investible corpus of the EPF at 8 per cent. This determines the income earned by the EPF. But then he also has to raise interest rates on PPF and GPF, the other provident fund schemes. This will raise his deficit, and he appears to be completely unwilling to do this. The other way would be for the EPFO to handle the problem itself. It could pay interest out of unclaimed deposits. This is an unsustainable solution because though the deposits may be untouched for three years, members can claim their money at any time. When they do, this could lead to the scheme blowing up like the US-64, and perhaps on a much bigger scale because the US-64 had about half the Rs 1.5 lakh crore that the EPF has.

It is essential that interest rates on the EPF are not decided without giving a thought to the earnings. Instead, what is earned should be what is paid out. Instead of bailing out EPFO in violation of the law, or changing the law, if the finance minister sticks to his guns and does not give in, he will be sending an important message to the trade unions. Even if this year, under pressure from the Left, the FM has agreed to higher rates, next time EPFO had better think carefully, because if this path is followed then its very sustainability will be in question. Given this situation, the Left would need to seriously reconsider its stance.