The Telegraph
Since 1st March, 1999
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Please-all PF raids reserves
- Interest rate retained at 9.5 per cent

New Delhi, May 28: The good news first: employees’ provident fund subscribers will get interest at 9.5 per cent for 2004-05.

The bad news now: the fund’s custodian will have to dip into ' and devour a large portion of ' its reserves to please the Left and spare the finance ministry.

The central board of provident fund trustees today decided to honour the Prime Minister’s commitment to increase the interest rate from the declared ' but unimplemented ' 8.5 per cent to 9.5 per cent.

“The provident fund interest rate for 2004-05 has been recommended at 9.5 per cent,” labour minister K. Chandrasekhar Rao said after a five-hour meeting of the board of trustees here.

The Prime Minister had assured the Left leaders sometime ago that the interest rate would be increased to 9.5 per cent as they had demanded.

That assurance was seen as a quid pro quo because it was made public a few hours after the government decided to increase the foreign direct investment cap in telecom, which the Left had been opposing.

The erstwhile BJP-led government had cut the provident fund interest rate to 9 per cent but threw in a bonus later, making the effective rate 9.5 per cent.

The fund had announced an interim rate of 8.5 per cent for 2004-05 but it was not notified. The cloud of uncertainty has been removed by today’s announcement that the rate would stay at 9.5 per cent.

The decision will leave the provident fund with a cumulative deficit of Rs 716 crore. The shortfall will be plugged by squeezing money out of a special reserve fund which now has around Rs 950 crore. This reserve has been created out of the unclaimed deposits of provident fund holders.

Many of them belong to companies that have long gone into liquidation; others are those who do not want to take the trouble of collecting their dues or are not aware how to do so. The unclaimed deposits have earned interest of over Rs 600 crore.

The reserve fund is not meant for meeting shortfalls ' it can at best be a stopgap arrangement. The rate for the current year (2005-06) has yet to be decided and the reserves will be insufficient to meet the shortfall year after year.

Hard-nosed economics should have pulled the interest rate down to 8 per cent ' that is what the provident fund earns by parking most of its cash in a government deposit scheme.

With the finance ministry refusing to raise that rate and the Left insisting that the subscribers should not be touched ' the original demand was 12 per cent ' the fund had little option but to tap its own reserves.

Trade union leaders said they were “unhappy” with the move to dip into reserves. They said the trustees would request the Prime Minister and the finance minister to increase the interest the government pays the fund.

In January, the government had given provident funds the freedom to invest up to 5 per cent of their corpus in the equity market and another 10 per cent in corporate debt.

But the fund has not yet done so, primarily because of opposition from trade unions and its conservative instincts. Barring aberrations, stock markets have outperformed other regular avenues of investments but an element of risk is always at play.

The fund has appointed a multinational consultancy, Mercer, to suggest ways to maximise returns. It remains to be seen whether the fund will explore the new avenue if the consultant recommends such a course of action.

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