The country?s poor do not benefit from employees? provident fund rates. Any government-supported and artificially high EPF rate, beyond what returns on EPF investments fetch, is a regressive cross-subsidy from the poor to the relatively rich. That the National Democratic Alliance, courtesy Mr Sahib Singh Verma, trod the same path at the time of the Employees? Provident Fund Organization?s golden jubilee celebrations in 2003-04 is neither here nor there. Unlike the United Progressive Alliance, supported by the left, the NDA did not explicitly speak for the poor. Yet the left has insisted on a 9.5 per cent EPF rate as quid pro quo for reforms like raising foreign direct investment equity caps and, if reports are to be believed, would like the rate to be 12.5 per cent. Not only is this disproportionate to returns on EPF investments, given inflation rates, even 9.5 per cent represents an excessive real return and inevitably, exerts upward pressure on real interest rates. The moot point, leading to a tussle between the labour and finance ministries, is how this 9.5 per cent will be financed. The finance ministry is absolutely right. Support from the budget is unwarranted and unfair. If the EPFO?s central board of trustees recommends 9.5 per cent, that does not concern the country directly, unless citizens pay through budgetary bailouts. The EPFO has to finance this artificially high returns itself. It was this tussle that led to the 9.5 per cent of 2002-03 and 2003-04 not being notified.
We will now also have 9.5 per cent in 2004-05. The returns for 2005-06 will be decided in June, and judging by present trends, there will be no deviation from 9.5 per cent even then. Thankfully, the finance ministry has refused to budge and the EPFO has no option but to dip into the special reserve fund, as it has done in the past. Inflows into the special reserve fund are from employer contributions when employees have quit the scheme and are meant to handle contingent liabilities when employers default. The fund is not meant to guarantee high returns. The upshot of the decision by the board of trustees, pushed by the left, is that the EPFO will no longer be financially viable and may eventually have to be wound up. Given the EPFO?s inefficiency, this may be a desirable result, although this is not an outcome the left would have wanted. The key to reforms is offering investors choice, linked to returns and appetite for risk. By winding up the EPFO, the left will have perversely contributed to this intended reform.