People's Democracy

THE central government, with Yashwant Sinha as finance minister, has reduced the statutory arrangement for the administration of Employees Provident Fund (EPF) to a mockery. The EPF Act vests all powers of administering the Fund with the Central Board of Trustees (CBT). But, through the provisions in one of the Schedules to the Act and the Scheme formulated under the Act, the power to determine the rate of interest has been 'usurped' by the central government, reducing the role of the CBT to that of ' being consulted.'

During the last two years, the government had grossly undermined even this process of 'consultation'. The CBT, while exercising due care that the interest rate recommended by it did not result in an over-drawal on the interest suspense account (interest earnings during the year), as per provisions in the EPF Scheme, had unanimously recommended rates of interest at 12 per cent for the year 2000-2001, and at 10.25 per cent for 2001-2002. But, the government, without holding any consultation with the CBT, (as required under the Act), simply overruled its recommendations and reduced the rate of interest to 11 per cent for 2000-2001 (from July 2000) and further down to 9.5 per cent for 2001-2002.

This issue was taken by the Centre of Indian Trade Unions (CITU) to the Rajya Sabha Committee of Subordinate Legislation, which after a thorough going consideration, made certain recommendations in its 130th Report, presented to the Parliament during November 2000. The same committee in their 134th Report, presented during April 2001, has further commented upon the issue. The government is yet to take any concrete action on the recommendations of the Parliamentary Committee.

In this background, the CBT met on January 22, 2002 to decide on its recommendation on the rate of interest to be declared for the forthcoming year (2002-2003). Even before the meeting took place, the media was full of stories predicting an imminent further fall in the interest rates on provident fund. Moreover, news was floated that this reduction would set the trend for similar downward revision of interest rates on small savings and other long-term bank deposits, etc.

The meeting of the CBT was, however, preceded by a meeting of the finance and investment committee (a sub-committee of the CBT), which customarily examines the interest-rate issue in depth and makes its own recommendations to the CBT.

The EPF Organisation in their estimates, presented to this committee and the CBT, had brought out the following facts:

"Expected interest earning during the year 2002-2003 Rs 5978.50 crore

Expected outflow on payment of interest to PF members @ 9.5 per cent  during the year 2002-2003 Rs 5630.69 crore

"Yield on bonds and securities continued to fall during the year 2000 and 2001 due to easy liquidity, poor credit off take, cut in CRR by Reserve Bank of India, etc.

In the backdrop of recommendations of Y V Reddy Committee, interest rates are likely to go down further in the year 2002-2003. In that event, interest rates on small saving schemes and Special Deposit Scheme (SDS) will also fall further. Exact financial implications about reduction of interest rates will be known only after presentation of the general budget of central government for the year 2002-03 in the Parliament by the end of February 2002. However a reduction of 1 per cent in special deposit interest rate will cause reduction in total interest receivable in the provident fund to the tune of Rs 476.84 crores (1 per cent of amount in SDS)".

Based on these assumptions, the EPF Organisation had suggested as follows:

"With the probable earnings we may be able to manage to service the members with payment of interest equivalent to SDS interest rates on monthly running balance for 2002-03".

Thankfully, the CBT meeting, chaired by the union labour minister, Sharad Yadav, unanimously decided against recommending any further reduction in the interest rate on PF for the year 2002-2003. The CBT decided to take up certain issues with the central government, at the finance minister’s level, and with the Reserve Bank of India. The CBT also decided to meet again before March 31, 2002, to deliberate further on the matter. However, visualising certain technical difficulties that could arise if the interest-rate notification was not issued in due time, the CBT also decided on an interim recommendation. It recommended continuation of the interest rate of 9.5 per cent till the outcome of the efforts at central government level is finally known. (The CBT, thus, firmly expressed its opposition to further reduction of interest rate).

It must be noted here that this decision is the result of the combined effort and thrust put up by the trade union representatives in the CBT. This has, of course, been presented as a temporary relief for the PF subscribers in particular and the community of small savers in general. But now, the media speculations are focussed on what would be the finance minister’s announcement on interest rate related issues in his budget speech, slated for February 28, 2002.

There are certain basic postulates that need contemplation in this connection.

‘RESTORE 12 per cent INTEREST’

The CBT deciding against making any concrete recommendation at its meeting on January 22nd, might perhaps be the result of the bitter experience of the previous two years. If there is no guarantee that the central government is going to pay any heed to the recommendation of the CBT, why then make one at all?

The investment holdings of the Employees Provident Fund, in respect of the EPFO administered Unexempted Establishments alone, are around Rs 60,000 crore as at the end of the year 2001. Of this, 80 per cent is invested in the Special Deposit Scheme (SDS), which has been closed for further deposits. Even then, the interest accumulations, presently @ 9.5 per cent will be credited in the SDS only. This huge corpus will be hit by any decision that the government may take on the administered rates of interest.

Apart from this, the present guidelines for investment of PF accumulations stipulate a minimum of 25 per cent to be invested in central government Securities. The government drastically cut down the interest on Government Bonds, as a result of which even a Central loan with a 19-year maturity period will fetch a yield of only 8.48 per cent (as on 30.11.2001).

The government sits silent on several recommendations made by the CBT for liberalising the investment guidelines. Perhaps, this is the only arena where the Reformer-in-a hurry, Yashwant Sinha, is against liberalisation!

The CBT had also, unanimously again, requested the government to restore the interest rate of 12 per cent on SDS deposits. The government while imposing reduction of interest rates on small savings instruments during 2000 and 2001, had made the reductions only prospective on future deposits. On the same analogy, the CBT had made a strong plea that 12 per cent interest rate should be continued on the balance in the SDS as at 31.3.2000 and should apply the reduction in rates only to the accumulations (by way of interest credit) from 1.4.2000 onwards. This is one main issue, which the CBT would like the ministry of labour to take up with the finance ministry.

There has been much hype in the media, especially in the financial and business columns, over the Y V Reddy Committee Report. There are enough indications that the Budget 2002-2003 would see implementation of its recommendations. Several members of the CBT had drawn the attention of the government, both during the CBT meeting as well as outside, to a singular suggestion made by the Y V Reddy Committee Report itself. While submitting the report, the committee had stated:

"We, considering the stakeholders’ interest, the implications for fiscal management and the centre-state relations, in all humility, suggest that this report be placed in the public domain and deliberated widely before taking a view on the recommendations."

The CBT represents a substantial chunk of the stakeholders and the total sum of money locked up in the investments, to which the administered rates of interest apply, is huge, if the funds of not only the EPF but also of the Exempted Establishments, Pension Fund etc., are reckoned. Hence, an important suggestion that had emanated is for the central government to convene a tripartite meeting consisting of employers, employees and representatives of finance ministry to discuss the whole gamut of issues comprising (a) administered interest rate structure in the economy, (b) investment pattern/guidelines for the CBT/EPF and (c) rate of interest being declared for EPF subscribers.

Holding a such a wide-ranging discussion before the government decides on the recommendations of the Reddy Committee Report is all the more important from yet another angle. The resources generated out of small savings schemes collected from within the states are transferred to the respective states by way of non-plan loans. There have been misgivings voiced by some state governments that the benchmarking of interest-rates, suggested by the Reddy Committee, could adversely impact mobilisation of small savings and thus deprive the state governments of presently available resources to a large extent. Moreover, there had been a complaint that the central government, which had embarked on interest rate reduction on small savings from 1998-99 onwards, had maintained the interest rate on non-plan loans to the states at its original level, without any corresponding reduction. This is an issue, which will have implications for centre-state relations, a point made out by the Reddy Committee itself. Hence, in all fairness, the finance minister should initiate such a dialogue process before he sets in motion any recommendation of the Reddy Committee.

Investments in the Special Deposit Scheme are held by the Reserve Bank of India, which applies the interest rate decided by the central government. A point, time and again raised in the CBT meetings, is that the RBI, which is holding the Provident Fund money of its own officers and employees, had all along been paying a rate of interest, which is at least 1.5 per cent above the EPF interest. The interest earned by the RBI employees, even when the RBI was paying a 13.5 per cent interest, had not been subjected to income tax. In this context, a suggestion has been made that the Reserve Bank of India may be requested to take over the total investments of the EPF, paying a real rate of interest of minimum 6 per cent over inflation, at an inflation-indexed rate.

Thus, the decision of the CBT, not to opt for the suggested floating rate of interest linked to the interest on SDS deposits and its refusal to consider any further reduction of interest rate on PF, has raised many substantive issues. It is incumbent on the part of the central government to give due consideration to the issues raised, if it has any commitment for transparency and accountability.

One larger question that needs to be answered, is: whom does the softer interest regime benefits - the economy, the saving public, the borrowers from banks or the Central Government alone in its fiscal management exercise? It is obvious that the economy has not benefited, as investments have recorded only a negative growth. The public, particularly the senior citizens and the small savers, suffered huge losses by way of reduced returns on their investments. Banks have reported reduced credit off-take, forcing them to lock up their investible surpluses in government securities. But then, the central government has immensely benefited as it has robbed the workers and the public of thousands of crores of rupees and utilised the same for its fiscal management.

The political and democratic opinion in the country must demand the central government to reverse its anti-worker and anti-people policies on the interest rate issue, as also take on the larger economic mismanagement by the NDA government.