Chidambaram: Tough stand

New Delhi, Dec. 23: The government has decided that the interest rate on employees provident fund can be raised only if the organisation managing the kitty is able to come up with a formula that allows it to pay more than the 8.5 per cent interest it announced recently.

Finance minister P. Chidambaram has made it clear to his cabinet colleagues that the government cannot provide any grants to help the Employees Provident Fund Organisation (EPFO) dole out a higher interest rate on the Rs 1,50,000-crore corpus.

Subsidy payments are being phased out and new subsidies cannot be added to the list, finance ministry sources said.

The Left, which wants the 9.5 per cent rate retained, will be asked to recommend ways to bolster PF payouts without putting a strain on government funds.

The finance ministry would not even consider raising the interest on the special deposit scheme, which has a corpus of Rs 1,15,000 crore.

Two years back, the finance ministry had slashed returns on government securities, including the Special Deposit Scheme, in which 80 per cent of the PF money is invested. This was done to cut down on the interest burden. Interest on SDS was set at 8 per cent, far lower than the payout from the provident fund.

The remaining 20 per cent of the PF corpus is invested in government bonds and state-run corporations. These fetch a slightly higher rate of interest. The current average yield from EPF investments is estimated at 8.75-8.8 per cent, with public sector securities yielding the highest returns. But the issuers of these securities, too, are trying to cut down rates.

Taking into account administrative and overhead costs, it is difficult to pay more than 8-8.25 per cent. During the last two years, higher payouts were sustained by acts of financial jugglery like renaming the interest surplus account.

In fact, the finance ministry feels the EPFO should become more market-oriented and take advantage of higher returns on equity and corporate bonds to bolster its sagging earnings.

It would like the fund to follow the non-government provident and pension funds, which are investing up to 5 per cent of their corpus in the equity market and another 10 per cent in corporate debt.

If EPFO, with its huge savings chest, were to accept this prescription, it could give a fillip to the domestic stock market, which has been on a roller-coaster ride in the recent months.

Analysts say such a move could see up to Rs 6,000 crore flowing into the market. However, trustees of the two biggest non-governmental provident funds ? the Employees Provident Fund the and Public Provident Fund ? are known to be very conservative. It is unlikely that theywill accept such advice, at least in the months to come.

But North Block officials argue that in order to continue paying higher returns, it was necessary to search for new avenues of investment which could allow organisations like the EPF to earn enough. One of the routes to that goal runs through the market.