'When genuflection becomes a compulsive habit, it means goodbye to strong governance'

Governments that genuflect for no rhyme or reason do not make a pleasing sight. And when genuflection becomes a compulsive habit, it means goodbye to strong governance or sound policy underpinnings.

In an unexpected move, the Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO) conferred a bonanza of sorts to the organised workforce by hiking the interest rate on their accumulated contributions to 9.5% effective 2010-11 from the present 8.5%.

This time around, unlike in the past when this issue was often contentious, there was no such demand even from the normally vocal representatives of trade unions.

Since no instrument, including pure debt funds, in the market fetches such a return  and a long-term bank deposit earns only 7.75%, how on earth can such a largesse be funded?

We are told that EPFO has stumbled upon a tidy surplus of `1,731 crore in its Interest Suspense Account and this sum is adequate to discharge the additional liability.

What is glossed over is the fact that, under normal circumstances, EPFO cannot afford this higher interest rate, unless it is ready to live with a deficit of `1,600 crore.

Happily, this situation was averted, thanks to the scrutiny of the suspense account which had revealed accounting errors in the calculation of interest in the past and the resultant windfall income under this head is more than adequate to foot the extra interest burden.

The ramifications, however, go deeper. It is a safe bet that, more or less, the workers in the organised sector would have been content with the status quo in this regard. Having thus set a precedent, the Board of Trustees would find it difficult to lower the interest rate next year, should circumstances warrant.
EPFO has been lucky to be able to find the wherewithal but what about the private provident funds.

The latter are required to pay the same interest rate on their corpus as well but how are they going to meet the fresh interest outgo.

With strict norms governing investment of the amounts lying in the provident funds, finding avenues for parking these sums that yield an average of 8% is bound to be difficult.

The issue of investing in risky equities where the returns are higher is still unresolved.

EPFO may have to dip in to its reserves next year —- for now, the crisis has been warded off thanks to the stroke of serendipity —- but for private provident funds, financing the enhanced liability this year itself may be difficult.

Then, there is the macro dimension. The government has often gone on record that it wants a conducive interest rate environment that would promote growth.

The latest move conflicts with this policy and merely queers the pitch for a hardening of interest rates across the spectrum.

The Centre, with its huge borrowing programme, may be a victim of this largesse, which, it should be noted, accrues to a small segment of the workforce.