Snatching away the piggy-bank

For lakhs of workers in the country, the writing on the wall is clear. Theera of high interest rates is over. Their savings will be deplet...

For lakhs of workers in the country, the writing on the wall is clear. Theera of high interest rates is over. Their savings will be depleted as thegovernment and the banking sector regulator Reserve Bank of India RBI havebeen pushing for lower interest rates in the country. As part of a majorresolve to make borrowings cheaper for industry, entrepreneurs and thegovernment, workers will also have to pay a price.

The government8217;s latest move in this direction has been the one percentagepoint cut in employees provident fund EPF to 11 per cent last monthdespite strong opposition from the labour force and a section of thegovernment itself. The cut in EPF follows a series of similar measures inother small saving schemes. The government first cut the public providentfund PPF by one percentage point to 11 per cent in January this year. Thiswas followed by an identical cut in general provident fund GPF rates witheffect from April 1, dealing a severe blow to investors.

Workers are already up in arms against the gradual reduction in interestrates on PF. Knowing well that there will be stiff opposition from workersagainst any cut in EPF, the government brought down the interest rates onother saving schemes like post office saving schemes, National Saving Schemeand National Saving Certificate. The Reserve Bank on its part reduced theBank Rate BR and cash reserve ratio CRR to bring down the lending ratesof commercial banks.

Tapan Sen, National Secretary of Centre of Indian Trade Unions, has said8220;The reduction of the interest rate has affected the financial position oftwo crore workers across the country.8221; 8220;The cut in EPF rates will putpressure on banks to reduce lending rates and deposit rates. Banks wereusing this high EPF rate as an excuse for not reducing the lending rates.But for a common man or an employee it will mean further decline in itsincome,8221; said a former bank official.

Sensing the mood of workers, the Labour Ministry has opposed the FinanceMinistry8217;s move to reduce the EPF rates, but it8217;s unlikely that the latterwill reverse its decision. The Central Board of Trustees of PF had earlierrefused to reduce the interest rates and maintained that a review ofinterest rates would be done only in 2001-02. However, the Finance Ministryoverruled the decision of the trustees and cut the rates.

Sinha8217;s ministry did enough spadework before effecting the rate cut. Thegovernment first reduced the interest rate on Special Deposit Scheme whereover 80 per cent of EPF funds is parked. With the returns on EPF fundscoming down, it was no longer feasible to maintain the interest rate at 12per cent. 8220;The rate cut is a corrective measure which was long overdue.Even after the cut, the rates are still attractive in view of the tax breakson PF investments,8221; ministry sources said.

It makes sense for Finance Minister Yashwant Sinha to cut the rates as hecan also reduce the debt burden of the government. The total deposits underthe EPF scheme are estimated to be around Rs 70,000 crore. The totaldeposits under post office schemes amounted to Rs 46,480 crore, depositsunder NSS and NSC work out to Rs 1,05,475 crore and PPF Rs 3,204 crore. Theinterest burden on these schemes runs into several hundred crores and a goodpart of the government8217;s revenue is used to service this debt.

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The cut in EPF rates alone will result in a saving of Rs 700-1,000 crore forthe government every year. To put it differently, employees will lose thisamount every year in order to save money for the government. Not only that,as the government is also a big borrower in the market, the fall in generalinterest rates will be a boon for the government. 8220;Instead of putting itshand in the bowl of workers, the government should take other measures tocut costs and bring down general interest rates. The government can coverhalf of the fiscal deficit if it recovers over Rs 51,000 crore ofnon-performing assets defaulted loans of public sector banks stuck withvarious borrowers,8221; said P.S. Menon, who works in a public sectorcompany.

He says the inflation rate has already gone up to 6.20 per cent. 8220;Providentfund is my only savings. There is no question of any other saving as I havea family to support. After retirement, I can only bank on my PF andgratuity. If the return on my PF goes down, what will I do in my old age?What is going into the PF account is my money8230; The government should givea decent return on this fund,8221; Menon said.

India8217;s record on the savings front is far from satisfactory. As per theReserve Bank figures, the gross domestic saving rate had declined from 25.5per cent of GDP in 1995-96 to 22.3 per cent in 1998-99. However, it is to beseen whether the government, which is eager to push down interest rates inthe country, will pay any heed to the demands of trade unions. 8220;Thereduction shows the government8217;s resolve to bring the administrativeinterest rates in line with those prevailing in the money markets,8221; said aBirla Mutual Fund representative.

The latest development on the PF front follows a recent turmoil over thedeployment on pension and PF funds. A committee which looked into themanagement of such funds recommended various measures including deploymentof funds in capital market related instruments. Even bankers have for longbeen arguing in favour of deregulating PF and other saving scheme rates inline with other interest rates the RBI has already deregulated depositrates and lending rates. However, workers are unlikely to support thedemand for deregulation of interest rates on PF and saving schemes as ratesare expected to fall when controls are removed. Once bitten twice shy, theyare unlikely to settle for lower returns once again.

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