Elections are due in Delhi, Rajasthan, Madhya Pradesh and Chattisgarh and Central elections are also close. Consequently, efforts by the labour ministry and the labour minister to postpone unpopular decisions are understandable. The government has decided to slash interest rates on employees’ provident fund by 0.5 per cent to 9 per cent, with a caveat. The golden jubilee celebrations of EPF are going on. In a golden jubilee year, employees are entitled to a bonus. To compensate the rate cut, employees will be granted 0.5 per cent bonus in 2003-04. Of course, the bonus applies to employees statutorily covered. That is, of 30 million EPF employees, 25 million will get 9.5 per cent and the remaining 500,000 will have to settle for 9 per cent. The Indian workforce has 400 million people, of whom 370 million are in the unorganized sector. The poor are in this sector, without access to EPF, pensions or social security. The attempt to project 30 million EPF employees as poor is therefore incorrect, and artificially high returns to EPF employees imply an unacceptable cross-subsidy from those who are truly poor. Inflation rates have dropped. One tends to forget that nominal interest rates on EPF, public provident fund and small savings were around 5 per cent till the end of the Sixties. They inched up to 12 per cent in 1986-87, thanks to high inflation.
Mr Sahib Singh Verma still wants 12 per cent and so do unions, since 12 per cent was an explicitly mentioned goal in the recent strike. Does that mean that these people also want a return to 12 per cent plus inflation rates' It must be remembered that inflation hurts the genuinely poor much more. Or despite the drop in inflation rates to around 5 per cent since 1996-97, do these gentlemen want artificially high real returns of 7 per cent' PPF and small savings rates have been slashed to a benchmark of around 8 per cent and higher rates on EPF are unsustainable. The labour minister claims that wise investment decisions by EPF justify higher returns to EPF employees. This is a false claim, as reports by the EPF’s central board of trustees’ sub-committee illustrate. Eighty per cent of the corpus of Rs 140,000 crore was invested in the special deposit scheme with artificially high returns, implying annual subsidy of Rs 14,000 crore by the finance ministry. Thankfully, the finance ministry has discontinued special deposits from June. The labour minister wants to convert EPF into a bank and the Insurance Regulatory Authority has recommended its conversion into a proper pension fund. In either case, in the absence of unwarranted cross-subsidization, artificially high returns are impossible, with the benchmark return on government securities at marginally over 5 per cent.