August 21, 2004

INTEREST RATE ON EMPLOYEES PROVIDENT FUND

(Note Submitted to the UPA-Left Coordination Committee)

The NDA regime had lowered interest rates on the Employees Provident Fund (EPF), which had remained at 12 per cent from 1st April 1989 to 30th June 2000, in successive phases as under:

2000 – 01: 11 per cent (from July 2000)

2001 – 02: 9.5 per cent

2002 – 03: 9.5 per cent

2003 – 04: 9.5 per cent

The Finance Minister of the NDA regime had accepted the recommendations of an Expert Committee headed by the then Deputy Governor of the Reserve Bank to benchmark the administered interest rate (on small savings, GPF, PPF, Special Deposit Schemes (SDS) etc) to the average yields of government securities of equivalent maturities in the secondary market. Announcing this in the budget speech for 2002-03, he reduced the administered rate of interest from 12 to 8 per cent. Nearly 80 per cent of the entire corpus of the three schemes under the EPF Act is deposited in this SDS and lowering of interest rate on this had been the basic cause of lowering the interest on EPF during successive years of the NDA regime. The Finance Minister of the NDA regime also decided to scrap the Special Deposit Scheme (SDS), which was started in 1975 for parking non-Government provident, superannuation and gratuity funds.

The CMP had stated: “Interest rates will provide incentive both to investors and savers, particularly pensioners and senior citizens. The UPA Government will never take decisions on the Employees' Provident Fund (EPF) without consultations and approval of the EPF board”. This commitment has to be matched by the financial and budgetary policies of the UPA Government.

But, at the meeting of the EPF Board on August 9, 2004, a majority decision to recommend an interim rate of 8.5 per cent was announced, deviating from the longstanding tradition of the EPF Board to take decisions only by way of consensus. This was opposed by the trade union representatives in the EPF Board, except those from INTUC. This has resulted in a further reduction of one per cent from the 9.5 per cent that was in force for the last two years. 

This has caused a severe heartburn among all sections of employees and workers. This reduction in the interest rate is likely to give a political mileage to the NDA forces to exploit the resentment among the workers.

The Employees Provident Fund is a social security scheme. The accumulations in the EPF are not comparable with any of the other deposits or investments, either in the banking system or even the saving schemes operated by the Government. While the latter have a pre-determined periodicity and a definite date of maturity, the EPF accumulations are almost a life time deposits.  The Government holds these accumulations for decades together and in the case of Special Deposit Scheme, there has been no outflow, since 1975. Hence, the interest payable on EPF bears no comparison with the other time liabilities of either the banking system or the Government.

Therefore, it is necessary that the social security funds should be accorded a differential treatment in the sphere of interest rate and not forced to mechanically toe the banking system.

Apart from the above, this decision is a great blow to the workers as inflation, even in terms of wholesale price index, has already crossed 7.5 per cent (nearing 8 per cent). The inflation, if measured in terms of consumer price index will be much higher. The 8.5 per cent rate of interest will not compensate the workers against the runaway inflation and result in their getting a negative real rate of return. Surely, this is not the way to provide a safety net for the workers in their old age.

Further, the present pattern of investment of the corpus of the EPF Schemes and Government guidelines in respect thereof is such that unless the Government revises upwards the administered rate of interest (on Special Deposit Schemes), the injustice meted out to the workers cannot be undone.

The EPF Act and the Scheme there under do not provide for an interim rate. Lakhs of workers, who exit the EPF Scheme every month and whose claims are to be settled will not get the benefit of a higher interest rate, if at all it is enhanced subsequently.

There is also a peculiar problem faced by the EPF subscribers. Though the NDA regime had announced an interest rate of 9.5 per cent for the previous two years, the relevant government notification on that had not been issued. As such the rate recommended by the EPF Board is not final until such government notification is issued. Because of this, the workers are not getting the interest credit in their EPF accounts.

Even with the resources available with the EPF Organisation (EPFO), it is possible to allow a higher interest rate. The EPFO had been left with a surplus in the interest earned during the past years, after meeting the interest liability for the corresponding years. This surplus is not correctly reflected in the accounts of the EPFO, as the interest credit and debit are routed through an omnibus Interest Suspense Account. Even the CAG report for successive years has pointed out this discrepancy and held the reply by the EPFO to be untenable.  While this area can be scrutinised to provide some extra relief for the current year, the basic issue remains as one of providing a safe investment avenue for social security funds and ensuring a real rate of interest, over inflation, on such funds.

This issue can, therefore, be addressed only by reversing the past decisions of the NDA regime of (i) dismantling the Special Deposit Scheme and (ii) lowering the interest rate on SDS from 12 to 8 per cent.