The provident fund is in effect a massive subsidy scheme for the labour elite—and especially middle-class professionals. It offers guaranteed returns that are completely de-linked from the rates of return in other parts of the economy.
On Tuesday, the Employees’ Provident Fund Organisation (EPFO) decided to increase the returns paid to depositors by five basis points—from the existing rate of 8.75% to 8.8% for financial year 2015-16. This beggars belief at a time when inflation has come down sharply and the Indian central bank is trying to bring down interest rates. Such decisions further mess up the yield curve as well as monetary policy transmission.
The government also took a welcome step on the same day by deciding to remove the spread some national savings schemes enjoy over government securities of comparable maturity. Now it must go further and link provident fund returns to market interest rates, perhaps the benchmark long-term government bond.