New Delhi: The Finance Ministry has demanded that the Employees Provident Fund Organisation (EPFO) cut the 8.65 percent annual return it was planning to offer about 85 million member workers, according to a ministry memorandum reviewed by Reuters.
The reason is that the yield may not be justified given the fund’s performance, but two officials with knowledge of the discussions said the bigger factor is concern that the high return would hurt the economy by reducing banks’ ability to lend at attractive rates.
The EPFO, which is administered by the Labour Ministry, annou-nced just before the general elections that it would pay 8.65 per cent for the last financial year ending March 31, 2019, up from 8.55 per cent in the previous year.
But with inflation around 3 per cent, the yield is appealing to those who want to save and is forcing banks to keep their savings deposit rates at similar levels, the officials said. There are also fears that banks will lose deposits to the fund, they added.
That is very bad news for borrowers, such as small businesses, who are having to pay double-digit loan rates in an economy that is slowing and where their power to raise prices is constrained.
A senior Labour Ministry official said the concerns of the Finance Ministry would be considered and the issue soon resolved.
A finance ministry spokesman declined to comment.
The high rates on savings are undermining attempts by the Reserve Bank of India to provide stimulus to the economy.
In the memo, a Finance Ministry official tells a counterpart at the Labour Ministry that the proposed rate of return “is not in line” with the fund’s rules. Those rules say that the government needs to make sure it doesn’t set an interest rate that is out of sync with the fund’s returns.
The memo, dated June 12, said: “Ministry of Labour & Employment is therefore advised to consider a rate of interest for FY 2018-19 which does not fully utilise the surplus of the previous year and leaves a reasonably higher surplus in the account undistributed,” adding the memo is issued with the approval of Nirmala Sitharaman.
