People's Democracy

United Oppsition To Reduce EPF Interest

W R Varada Rajan

NORMALLY, the Central Board of Trustees (CBT), EPF meets during March every year to make its recommendation to the government on the rate of interest on EPF for the next financial year. But, during the last few years there is considerable time lag on this score, in view of successive attempts to reduce the interest rate and the trade union resistance thereto.

The EPF interest rate for 2004-05 was also lingering on till May this year. First, the labour minister, after four rounds of discussions in the meeting of the CBT, announced an interim rate of 8.5 per cent as a majority decision. It may be recalled that the prime minister had assured the UPA-Left coordination meeting during August 2004 to consider the Left request to not to reduce the interest-rate further from 9.5 per cent. But, there was no decision on this until May 2005. The prime minister convened a meeting on the subject on May 4, 2005 and a sub-committee, including two representatives of the finance ministry, was constituted to go into this issue. The sub-committee, which met on May 25, 2005, felt that either budgetary support be extended as one time measure or the interest on Special Deposit Scheme (SDS) be hiked from 8 to 9.5 per cent. Both the alternatives did not find favour with the representatives of finance ministry. Ultimately, on May 28, 2005 the CBT meeting took a majority decision to dip into the Special Reserve Fund (to the tune of Rs. 716.07 crore) to continue the interest rate at 9.5 per cent for 2004-05. Trade union representatives protested this decision to drain the Special Reserve Fund, as that is the only fall back provision for settling the claims of workers of closed establishments, when employers had defaulted.

While taking this decision by majority, the labour minister also announced that in future in no case interest outgo should exceed the income of the fund, and in case the government declared a higher interest, it should bridge the gap of income deficit.

In this backdrop, the labour minister convened the meeting of the CBT on July 30, 2005 but it was postponed. The meeting was finally held on November 21, 2005. The figures placed at this meeting revealed that the interest yield (on EPF investments) could only sustain an 8 per cent interest for the year 2005-06. Even an 8.25 per cent would result in Rs 163.27 crore, which would go up to Rs 1176.37 crore if the rate of 9.5 per cent were to be continued.

This situation is the direct outcome of the policy of soft interest regime pursued by the government. The balance in the SDS is frozen as at March 31, 2004 level and the interest thereon is now paid to the EPFO. The options available to the EPFO as per government guidelines on investments can only fetch interest ranging from 6.5 to 6.75 per cent. (This was one per cent lower during corresponding period of last year.)

The government had, during 2004 and 2005, been issuing bonds bearing interest ranging from 5.5 to 6.5 per cent, which is lower than even the administered rate of interest (which stands reduced to 8 per cent since April 2002), and much lower than the prime-lending rate of the banking system (which now ranges from 10.25 to 10.75 per cent). All the securities as per approved pattern are now being quoted in the market at a premium and this would result in the yield on investments dropping further lower.

In view of this, all the nine representative of trade unions (including two from the INTUC) presented a joint letter to the labour minister requesting him to take up with the prime minister the issue of enhancing the rate of interest on the Special Deposit Scheme as well as on the government bonds, so as to ensure that the interest rate on EPF is not further reduced from 9.5 per cent. (see box item)

During the meeting, the labour minister attempted to push for a decision to declare the rate of interest at 8 per cent, once again by majority with the government and employers supporting it. As it is necessary for another meeting of the CBT to be held before December 10, 2005, the minister announced to hold another meeting on December 7, 2005. After protracted discussions, the minister put off the decision to the next meeting.

Though the issue is stalled at least till December 7, 2005, the finance ministry is pressurising the labour ministry to decide the interest rate at a level, which can be sustained by the interest income of the EPFO. This, in clear terms, means a reduction from 9.5 to 8 per cent. This would not stop here even. With the government resorting to steadily lowering the interest rate, there could be a further slide in the rate in the successive years as well.

This issue must be taken to the mass of the workers through wide campaign to build a strong resistance to the move to further reduce the interest rate on EPF.