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The Great PF Backtracking

Omkar Goswami


If newspaper reports of Friday 17 December are to be believed, it would seem that Prime Minister Manmohan Singh has acquiesced to the Left’s demand for re-hiking the interest rate on the Employee Provident Fund (EPF) scheme. After a meeting with Dr. Singh, Mr. Gurudas Dasgupta of the CPI told the press, “As I understood him, he [the Prime Minister] has agreed to increase the interest rate from 8.5 per cent to 9.5 per cent.” He also said, “I have never heard Singh [being] so sympathetic to the demands of the trade unions.” Almost immediately came a guarded response from the Prime Minister who said, “I have not said anything. I said we will consider it. When Parliament is in session, I cannot make any announcement outside.”


Let’s hope that Comrade  Dasgupta and his Left colleagues are fondly imagining goodies that are just not there. But that may not be so. There was an ominous note that trilled from people close to the government and the PMO. According to them, we should think of the Singh-Dasgupta dialogue as a strategic give-and-take process with the Left — against this “give” the government would extract a “take”. This worries me, because the “take” record of this government vis-à-vis the Left has been as illustrious as Parthiv Patel’s wicket-keeping.


The 13 December issue of this magazine had carried a comprehensive cover story on how successive Labour Ministers have destroyed the EPF. Not much more need be said except to reiterate a few things. First, the Employees Provident Fund Organisation (EPFO) has, believe it or not, 20,000 employees. The second is truly great news. For a body that covered 344,508 establishments involving over 39 million employees in 2003, received provident fund contributions worth Rs.11,388 crore in 2002-03, and administered a PF investment of a staggering Rs.102,747 crore as on 31 March 2003, it does not have a single modern financial expert among its employees or a treasury department! Thus, its 42-member Central Board of Trustees presided over by the Union Labour Minister blindly endorses parking funds in approved securities without any of the fiduciaries seeming to bother about the growing gap between EPFO’s returns on investments and its administratively imposed liabilities.


A Ponzi is a financial scheme which uses some depositors’ capital to pay interest to other depositors. In effect, it burns up capital to pay interest. Ponzis work in the short term but are doomed to fail over a longer horizon. I hate to say this in black and white, but the fact of the matter is that the EPF is India’s largest Ponzi — much larger than what UTI was in its worst days, but backed by the fiscally broke central government. 


Consider some arithmetic. According to the EPFO, 79 per cent of its Rs.102,747 crore of investments are parked in the central government’s special deposit schemes which pay 8 per cent interest. That translates to an interest income of Rs.6,494 crore per year. In 2002-03, administrative costs of the EPFO were Rs.430 crore. At even the existing 8.5 per cent interest, the fund must therefore generate Rs.9,163 crore to cover its costs and protect the capital. Which means that the residual 21 per cent of it funds must fetch Rs.2,669 crore, or return of 12.4 per cent, which is well nigh impossible in today’s scenario. So, the EPFO is already eating into its capital.


Now consider what the proposed 9.5 per cent interest will imply. To meet that and administrative costs, the fund must generate Rs.10,191 crore. Hence, EPFO’s 21 per cent residual funds have to generate Rs.3,697 crore per year. That translates to an additional return of 17.1 per cent on the remaining 21 per cent of EPFO’s funds! Do I need to say more?


On this one, the Prime Minister had better not think of strategic “gives” and “takes”. In a milieu where the government is already committed to the National Employment Guarantee programme, if Dr. Singh were to agree to a hike in the EPF interest rate, he had better believe that in the coming spring the trees of India will sprout bank notes, not leaves.


Published: Business world, December 2004


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