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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
Published: Business world, December 2004
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