New Delhi, Aug. 9: The government today cut the interest rate on employees’ provident fund from 9.5 to 8.5 per cent, signalling that it would not balk at taking tough decisions even at the risk of incurring the wrath of allies and dropping some notches on the popularity chart.
Over 3 crore subscribers of the employees’ provident fund (EPF) scheme will be affected by the cut, which was decided after six weeks of haggling between representatives of trade unions and the government on the board that oversees its operation.
Union labour minister Sis Ram Ola, also the chairperson of the board, said: “This is an interim decision. A final decision on the interest rate will be notified at the end of the year.”
Even after slashing the rate, the board will be left with a deficit of Rs 206 crore, he added. The gap will arise because the interest the fund earns on its money parked in the government’s special deposit scheme has been cut even lower by finance minister P. Chidambaram to 8 per cent. Some 80 per cent of the EPF corpus is invested in this scheme.
Ola was clearly on the defensive. “At the time of the final review at the end of the fiscal year 2004-05, the interest rate would be fixed depending on the available funds,” he said.
He assured subscribers that “it will not be lower than 8.5 per cent. If we earn more, the interest can go up”.
Outnumbered on the EPF board — trade unions have 10 members as opposed to the strength of 32 of government and employers’ representatives — labour leaders said they would hold protests on August 20.
“We have already decided to observe a national day of protest and one of the issues we will be highlighting is the decision on the provident fund interest rate,” said Citu leader W.R. Vardharajan after the board meeting.
CPM leader Nilotpal Basu described the decision as “unmindful of the concerns of the common people”.
The tussle between the trade unions, Left parties and the government started during the Vajpayee regime. The board had favoured a consensus but decided to go by majority opinion, realising unanimity was impossible.
Arguments in favour of the cut centred on the fact that since the fund itself was earning 8 per cent, anything above that paid to subscribers would bleed it white, ultimately debilitating its ability to pay anything at all. But the only union that accepted this logic was the Congress-affiliated Intuc.
The decision also comes in the backdrop of pressure on interest rates to go up because of rising inflation, which stands at 7.51 per cent and is expected to touch 8 per cent at the end of the week.
Still, the EPF cut has been sanctioned by Prime Minister Manmohan Singh and Chidambaram in order not to blot the government’s balance sheet any further. Finance ministry officials said the government has been forced to stall increases in interest rates on the EPF and small savings schemes as such a move will stretch its limited resources.
The gap between the government’s expenditure and income is Rs 137,407 crore while it pays an annual interest of Rs 129,500 crore on its borrowings. This burden will swell if it subsidises the interest paid to subscribers or investors on schemes it runs itself.
Market rates of interest — paid by banks — are ruling at a maximum of 5.5 per cent while the government is paying at least 8 per cent, which is the level now for small savings schemes.
What is surprising, however, is the political gamble it has taken while making a decision that is bound to be seen as unpopular, offering not only a hungry Opposition looking for issues a stick to beat it with but also angering its ally, the Left.