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Good signalling

EPFO cutting rates is a step in the right direction. There must be no roll-back.

By: Editorial |
Updated: December 21, 2016 12:02:26 am

It is a welcome sign that the Central Board of Trustees of the Employee’s Provident Fund Organisation (EPFO) — the social security provider for India’s organised sector workforce — cut the interest rate on its fund deposits from 8.8 per cent to 8.65 per cent for 2016-17. This is in line with the broader trend of interest rates moving southwards. Even after the reduction, the new rate is attractive for the four crore-plus subscribers of the EPF scheme. The 8.65 per cent return is also higher than the 6.5 per cent yield on 10-year government of India bonds, 7.5 per cent interest on one-year bank deposits or 8 per cent on post office-mediated small savings instruments such as the Public Provident Fund and the National Savings Certificates. Factor in the tax-free earnings on EPF monies, and the effective return on it works out to almost 10 per cent — quite high for a relatively risk-free and sovereign-backed quasi social security scheme.

The Indian economy today needs sentiment boosters, especially in the wake of the NDA government’s decision to withdraw high-value notes. One of the purported positive benefits of moving to a less-cash economy is the increased flow of funds through banking channels. That process may have already started, with the increase in deposits with banks expected to continue even after the one-time boost due to demonetisation wears off. This, in turn, would help lower interest rates in a scenario when loan growth has fallen to a two-decade low. The decision to reduce the rates on the EPF and other such administered schemes is important signalling: Firms as well as households need to be convinced that interest rates are firmly headed downwards and it is worth borrowing to rev up spending and investment.

The latest rate reduction is also encouraging because it, arguably, reflects awareness among the trustees that the EPFO cannot any longer dip into sources such as its suspense account to keep returns high. Retaining last year’s 8.8 per cent rate would have left the EPFO with a deficit of Rs 383 crore. The 8.65 per cent rate would produce a modest surplus of around Rs 70 crore. It may be premature to read too much into the decision given that the government was forced to beat a retreat the last time when interest rates were sought to be reduced from 8.8 per cent to 8.7 per cent, after resistance from trade unions. The Congress-backed INTUC has indicated its unhappiness at the decision while the RSS-backed BMS has accepted it. The challenge for successive governments is to ensure that the returns on provident funds are a true reflection of market determined rates — without the sovereign subsidising it for a small swathe of the country’s organised sector. The impact of the EPFO keeping rates too high will not just be on its balance sheet but also on the broader economy — it provides banks with more justification to not lower lending rates.

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