Tribune News ServiceNew Delhi, May 28
Employees Provident Fund Board today recommended 9.5 per cent interest to nearly four crore EPF subscribers for 2004-05 by withdrawing Rs 716 crore from Special Reserve Fund to bridge the deficit.
For paying 9.5 per cent interest, the country’s largest provident fund would incur a deficit of Rs 716 crore, Labour Minister K. Chandrasekhar Rao said after a five-hour meeting of the Central Board of Trustees of Employees
Provident Fund.
However, the shortfall would be made good from the special reserves of about Rs 950 crore.
The special reserves are funds forfeited and deposited in banks over decades and have earned over Rs 600 crore in interest.
Mr Rao said the reserve fund was created to enable premature withdrawal from the EPF.
The Special Reserve Fund will still have a balance of Rs 225 crore, but the Left parties were unhappy on withdrawing funds from it.
The EPF interest rate has been a bone of contention with the Left parties mounting pressure for higher returns.
Mr Rao said a special committee had been set up by Prime Minister Manmohan Singh and Finance Minister P Chidambaram to work out the modalities of paying interest on subscribers’ deposits.
Although the EPFO board had, at its last meeting, recommended an interim interest rate of 8.5 per cent for 2004-05, Mr Chidambaram in February raised that
to 9.5 per cent. This left the EPF organisation with the task of raising its own resources to bridge the shortfall of Rs 927 crore.About 85 per cent of the EPF corpus is invested in Special Deposit Scheme (SDS), the balance is invested in public sector/financial institutions, central government loans, state government loans, and government guaranteed loans.
The Finance Ministry has not hiked the rate of return on the SDS.
It is for the second time in the history of the EPFO that it has to bank on reserves for a bailout, the first instance being during the NDA Government, which granted 0.5 per cent golden jubilee bonus over 9.0 per cent interest to its subscribers in 2003-04.
The payment of interest to EPF subscribers at the rate of 9.5 per cent for 2004-05 is expected to be Rs 6,885.05 crore, an official release said.
It said the interest earnings had gone up to Rs 6,168.98 crore on the basis of actual income as on March 31, 2005 against the earlier projection of Rs 5,919.42 crore.
It also said the corpus of the EPF was Rs 79,764. 48 crore as on March 31 this year. Of this, 65.31 per cent was in investment holding in Special Deposit Scheme, 14.02 per cent in public sector or financial institutions, 11.52 per cent in central government securities, 8.67 per cent in state government loans and 0.48 per cent in government guaranteed securities.
While in 2001-02 and 2002-03 the net yields amounted to Rs 504 crore and Rs 204 crore respectively, it dipped to a (-) 271 crore in 2003-04. But the net gains from the previous two years would still result in a surplus of Rs 437 crore after accounting for the negative returns of 2003-04.
Analysts said the EPFO couldn’t sustain the 9.5 per cent beyond a few years and termed the measure as a populist move to appease a section of society and also an act of political compulsions.
The experts said when post office schemes and RBI savings bonds were giving 8 per cent interest returns, the EPFO move to raise the interest rate was clearly an indirect subsidy being provided to its contributors by the government.
They said the EPFO couldn’t sustain the interest rate for long as the existing contributors would get abnormally high returns than what they would from investing in market-related return instruments.
Experts were of the view that the measure would burn a hole in the EPFO’s corpus and the deficit thus created would have to be made up by the government. The burden would ultimately fall on pensioners and taxpayers, they added.
Referring to the other item on the agenda — annual valuation of the employees pension scheme from 1.4.2000 to 31.3.2003 — the Labour Minister said the matter was discussed but no decision was taken.
