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Journalism of Courage
The deadlock on the Employees Provident Fund interest rate continues, with the Central Board of Trustees of the Employees Provident Fund Office EPFO postponing the decision on the rate for 8217;04-8217;05 for another month. The labour minister asked the finance minister for a subsidy and was turned down. If the finance minister had agreed to pay that subsidy, he would have violated a decision taken by the FM and labour minister in June 8217;03 that the EPF cannot pay out more interest than it earns. But if the EPFO does not fix a rate, it cannot settle the accounts of members who retire who are entitled to a settlement within 30 days. And, further, if EPF pays the members some arbitrary rate, say, 12 per cent, then they will have to pay that rate to all members, leading to a deficit of Rs 2,728 crore. If they don8217;t, it will be a violation of the law that requires all members to be treated equally! Thus if the EPF pays its retiring members 12 per cent during the month till the decision is made, that may become a fait accompli. In other words, the EPFO is damned if it does, and damned if it doesn8217;t.
The finance ministry has still to ratify the EPF interest rates for 8217;02-8217;03 and 8217;03-8217;04. With the decision pending, interest has not been credited to member accounts for the last year. The impasse is the result of a system that is out of sync with the principles of financial management. The EPF is governed by the EPF Act, 1952. It requires the interest rate be fixed at the beginning of the year, before the interest is actually earned. Since the interest paid cannot exceed the interest earned, this involves making very accurate predictions. A small mistake could translate into a huge deficit as the principal is very large. This kind of accuracy is impossible. Interest rates are governed by international conditions, inflation rates, market expectations and many other factors. To minimise risk, the EPFO has been putting a large part of its money in the Special Deposit Scheme of the government which declares an interest rate at the beginning of the year.
