FinMin says it only ‘ advised’ on lower rate; labour ministry contests it
Even as a difference of opinion persists between the finance and labour ministries over the interest rate on the employees’ provident fund ( EPF), the latter is planning to approach the former to revise it.
The finance ministry maintains that it has only “ advised” the labour ministry about a lower interest rate of 8.7 per cent, while the Bandaru Dattatreya- led labour ministry says it was a “ directive”.
“Since the notification has not come, we’ll go to the finance ministry with a request to agree to the EPF board’s decision to give 8.8 per cent interest for 2015- 16,” said a labour ministry official.
The interest rate of 8.7 per cent would enable EPFO to earn Rs.190 crore more surplus compared with what it would have had the interest rate been 8.8 per cent for 2015- 16, according to estimates by EPFO.
However, the finance ministry estimates are bit different, according to which the surplus would be ? 326 more if interest rates are lower at 8.7 per cent compared to 8.8 per cent.
Moreover, these are accumulated surplus, said the finance ministry, adding even lower interest rate of 8.7 per cent would eat into the surplus of 2014- 15.
The Central Board of Trustees ( CBT) of EPFO had recommended 8.8 per cent interest rate. However, Labour Minister Dattatreya, in a written reply to the Lok Sabha on Monday had said that the finance ministry ratified an interest rate of 8.7 per cent.
A finance ministry source said on Wednesday that the ministry always advises on the rates and this time too, it followed the practice.
Since small savings rates were cut, the finance ministry advised lower interest rate, he said. The ministry had cut small savings rate for the first quarter of 2016- 17; for instance, public provident fund would fetch 8.1 per cent interest rate now compared to 8.8 per cent earlier.
The finance ministry source said the ministry’s advice was based on math. He stated that the EPFO went by the finance ministrys suggestion and agreed for 8.7 per cent interest rate. However, when it faced flak from trade unions, it blamed the finance ministry.
However, a labour ministry official said the finance ministry always ratifies the rates recommended by the CBT of EPFO. They do it on the larger concern of the fiscal consolidation.
Trade unions are unhappy with the decision of the finance ministry, and accused the ministry of disrespecting the CBT — the supreme decisionmaking body of the EPFO. Central trade unions have given a call for a daylong nationwide protest on Friday against the finance ministrys decision.
According to regulations, after the interest rate is approved by the CBT, it has to be approved by the finance ministry. Labour ministry sources say normally, the finance ministry vets the rate which is taken by the CBT since EPFO distributes interest rate according to the income generated from its investments every year and does not take money from the government.
“This is unprecedented. It has never happened before. The labour ministry is in its full right to request the government to reconsider this decision. We will take a decision soon in this regard,” said the labour ministry official cited above.
According to Financial Audit and Investment Committee ( FIAC) estimates, the EPFO would be left with a surplus of ? 673 crore after giving an interest of 8.8 per cent for 2015- 16. At 8.7 per cent interest rate, the surplus would be ? 863 crore. In fact, FIAC, consisting of representatives of employees, employers and the government, projected that EPFO would earn ? 34,844 crore in 2015- 16, which would be sufficient to offer an interest rate of 8.95 per cent to the retirement fund body’s 50- million subscribers.
However, the finance ministry estimated that there was asurplus of Rs.1,604.05 crore for 2014- 15. At the proposed rate of 8.8 per cent, this surplus would be reduced to just ? 673.85 crore. " Thus the proposed rate of 8.8 per cent seeks to draw on surplus of last year and this would adversely hit maintenance of relatively stable returns to investors fo the next year in a falling interest rate scenario," the finance ministry source said.
The earnings of EPFO in 2015- 16 is not sufficient to pay 8.7 per cent. The ratified interest rate of 8.7 per cent would leave a surplus of around Rs.1,000 crore with EPFO for 2015- 16. This is still lower than the surplus of Rs.1,604.05 crore for 2014- 15.
The finance ministry source said the interest income earned on 90 million inoperative accounts having a principal of more than Rs.35,500 crore is not distributed among them but rather distributed among existing account holders based on a CBT decision. But, this windfall for existing operative accounts will not be available from next year since CBT in its recent meeting has taken a decision to pay interest for the inoperative accounts which it stopped since April 1, 2011. "From where would these account holders be compensated for past years when the interest earning on their investment has been used by existing active account holders?" the finance ministry source asked.
Besides, as on March 31, 2016, around 300,000 accounts are pending for updation, in the absence of which it is difficult to calculate the exact liabilities towards them, the finance ministry source said.
Business Standard, New Delhi, 28 April 2016
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