NEW DELHI : India’s retirement fund manager and the Union labour ministry will defend the interest rate that was promised to 60 million subscribers earlier this year despite the finance ministry’s concern that the rate is too high, at least three officials familiar with the development said.

The Employees Provident Fund Organisation (EPFO) and the ministry will convince and communicate the decision to retain the 8.65% rate to “higher ups", the officials cited above said on condition of anonymity.

On 21 February, EPFO had raised interest rate on provident fund deposits to 8.65% for 2018-19, a 10 basis point increase from the 8.55% rate in 2017-18. It is the same as in 2016-17 but less than the 8.8% paid out in 2015-16. However, news agency Reuters reported on Friday that the finance ministry has sought a lower rate.

“EPFO’s central board of trustees is a tripartite body, and has representation from the finance ministry as well. When the decision was taken, it was unanimous. Four months after a decision was taken, you cannot go back. The message for the working class as well as the political bosses will be far-reaching," a government official, the first of the three people cited above.

According to a second official, the labour ministry believes that since the government does not pay subsidy on EPF rate and the payout is based on EPFO’s investment returns, there is “no logic to penalize the working class" by lowering their yield. This official said since the 2018-19 payout decision was based on two rounds of calculations and leaves the EPFO with a surplus corpus, they will be able to convince the finance ministry before crediting interest to its subscribers.

“There is no plan to lower the EPF interest rate," labour secretary Heeralal Samariya said when asked whether the finance ministry has decided to push the EPFO to cut the rate. However, the secretary declined to comment on why the finance ministry wants to cut the rate now when its own officials were part of the decision making when EPFO’s Central Board of Trustees (CBT) made the rate decision.

Citing a finance ministry memorandum, Reuters reported on 27 June that the bigger factor behind the advice to reduce rate was the concern that a “high return would hurt the economy by reducing banks’ ability to lend at attractive rates".

“Ministry of labour and employment is therefore advised to consider a rate of interest for FY2018-19 which does not fully utilise the surplus of the previous year and leaves a reasonably higher surplus in the account undistributed," the news agency had said in its report.

However, the retirement fund body had said after the CBT meeting on 21 February that its calculations shows that after an 8.65% payout in 2018-19, EPFO will be left with a surplus of only 151 crore. This surplus is less than 586 crore surplus it had in 2017-18.

“Our understanding is the EPF rate has very little bearing on bank rates as banks don’t borrow much from the body. Second, when we went to the equity market three years back and increased our exposure gradually to 15%, the logic we as government gave was that it will increase return for the EPFO subscribers who contribute every month from their salary. When the corpus is there, how do we justify a lower rate? Subscribers of EPFO should not be at the receiving end always. It’s their hard earned money and more so, EPFO indirectly competes with National Pension System and critics always argue that EPFO yield is lower. Why further lower it," argued a third government official. “The political message will be—you hike rate ahead of elections and after winning an election you lower it," this official added.

“We have been working for the working class and this interest rate hike shows that we do respect their faith in us," labour minister Santosh Kumar Gangwar had said in February after the CBT meeting. Interestingly, Gangwar continues to be in the labour ministry in the second term of the Narendra Modi government. The labour minister is the chairman of the CBT, the apex decision making body of the EPFO.

“Are we going to cheat the working class? A decision was taken unanimously and after four months, you doubt that and ask for a lowering of rate," said A.K. Padmanabhan, a CBT member and head of the Centre for Indian Trade Unions.

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