• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

THE 2.7-CRORE SUBSCRIBERS are bound to greet with dismay any reduction in the interest rate to be applied on provident fund balances, as now seems inevitable. The Central Board of Trustees of the Employees Provident Fund Organisation (Trust) seems only too aware of this. Hence, in the true tradition of bureaucratic decision-making, when confronted with tough policy choice, it has resorted to the expediency of postponing a decision. Witness the explanation, that the issue would be referred to the finance committee of the PF Trust and, as a measure of added comfort, it has also been suggested that the committee itself is being reconstituted. It requires no analysis that this is merely a dilatory tactic. After all, the Trust need not await the wisdom of a new set of experts on the earnings potential of the corpus of the scheme as the incumbent members of the finance committee themselves should be able to provide an accurate assessment. The alternative of a perception of relative lack of ability on their part would only reflect on the discharge of the fiduciary responsibility of the trustees themselves who put these experts in the first place.

If the issue were merely one of a harmless postponing of a difficult decision then nothing more needs to be said. But that is hardly the case here. Even as the trustees are deliberating on the interest rate to be applied on the PF balances for the ensuing fiscal, many subscribers under the scheme will be exiting on superannuation or resignation. If we assume that their settlement is not going to be withheld pending a final decision on the interest rate, then their accounts will have to be settled at the existing rate. Should the interest rate be eventually marked down, the settlement at a higher rate would result in wealth transfer from the existing subscribers to those retiring. That surely cannot be the intention of the trustees. But far more than ethical questions that this poses, the decision, or rather the lack of it, has larger macroeconomic implications as well. Any delay in aligning interest rates on PF balances in line with market conditions causes distortions in the interest rate regime in the economy. The commercial banking industry has been wary of making any downward correction to the interest rates on term deposit fearing flight of savings to the provident fund institutions. This, in turn, results in lending rates being artificially kept at a higher level than warranted, as banks would be keen to protect their spread.

The impact of high cost of funds to capital formation in the real sector of the economy is too well known to bear any reiteration. Of course, a downward correction in the interest rate may seem somewhat harsh on the labour force in the organised sector. But one can ignore the dictates of the market only at the peril of inflicting a greater pain in terms of loss of income opportunities for the disadvantaged sections, should distortions in the interest rate regime result in the economy not attaining its full growth potential.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Postponement panacea

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line