May 22: A sub-committee formed to study interest rates offered by the Employees’ Provident Fund Organisation has recommended a cut by at least half a percentage point from the current 9.5 per cent.
It said the interest rate needs to be within the band of 8-9 per cent.
“We have recommended this band of interest rate for the current year,” Baleshwar Rai, additional secretary in the labour ministry, said after the panel meeting.
The board of trustees of the organisation will meet on May 31 to decide how much the cut, if at all, should be.
There were indications that the sub-committee wants the rate to be slashed under 9 per cent because even after a cut to this level the fund will be in deficit — paying more than it earns.
Ajai Singh, the central provident fund commissioner, said: “We’ll have a deficit even if we pay 9 per cent.”
If that were so, the government would have to find the money to meet that deficit — estimated at Rs 105.18 crore — to back up a decision to keep the interest rate at 9 per cent or above.
At an interest rate of 8.5 per cent, the fund will have a surplus of Rs 218 crore and at 8 per cent, Rs 541 crore. These calculations are based on projected income from investments in this financial year.
Any cut in the interest rate is a political decision because it affects over 28 million workers in the organised sector and more so now, since elections are coming up later this year in five states.
As opposed to political considerations, the finance ministry argues that there is no economic sense in paying 9.5 per cent when interest rates on all other instruments — fixed deposits and even public provident fund (PPF) — are sliding.
Labour minister Sahib Singh Verma has been dourly battling pressures to cut the interest rate. Last year, the trustees had stood by him by rejecting a finance ministry proposal to cut the rate.
Since then, however, interest rates — generally — have dropped further. The PPF rate, for instance, now stands at 8 per cent.
Verma is no longer sure of his footing. All he would say yesterday was: “The employees will get the best returns.”
The statement takes into account the fact that even if the rate were cut to 8.5 per cent, it would still be the “best” return.
Some government sources see indications of a reduction to 8.5 per cent. A source said all three scenarios — 9, 8.5 and 8 per cent — would be discussed at the May 31 meeting.
The recommendation of the sub-committee comes in the wake of the one percentage point cut in the interest rate to 8 per cent in the special deposits scheme. Over 80 per cent of the Rs 140,000 crore corpus of the employees’ provident fund is invested in this scheme.