An unkind cut

The reduction of the rate of interest on Employees Provident Fund contributions is seen as part of the government's attempt to straitjacket in a market framework what is essentially an instrument of social security.

THE United Progressive Alliance (UPA) government fired its first shot at industrial workers on August 9 by announcing a one-percentage point reduction in the rate of interest applicable on workers' savings in the Employees Provident Fund (EPF). Although the decision was taken formally by the Central Board of Trustees (CBT) of the Employees Provident Fund Organisation (EPFO), which administers the corpus of funds in the EPF scheme, few believe that the decision came without intense pressure from the Union Finance Ministry.

More than 39.5 million members of the EPF scheme will see their savings shrink as a result of the move. The reduction of the rate of interest on EPF contributions from 9.5 per cent to 8.5 per cent follows several months of indecision by the previous National Democratic Alliance government. It was obvious that the Bharatiya Janata Party-led government had dithered on the issue because it did not want to antagonise the working class as it prepared to fight the last elections. In effect, the Congress-led government has treaded where the BJP, on the `India Shining' bandwagon, had dared not tread.

Issues relating to labour are always contentious, the arguments depending on the standpoint. For more than one year the hawks in favour of a cut in the interest rates applicable to the EPF have rested their case on the argument that the interest rate on contributions made by workers be reduced to bring it in line with the low-interest regime governing the rest of the economy. They argued that when bank deposits why earning a mere 3.5 per cent for the elderly, paying 9.5 per cent to organised labour was not only illogical but also unfair. They claimed that the section was being pampered at the cost of the rest of society. In fact, players in the capital markets went further by arguing that organised labour could get better returns if EPF funds were diverted to the stock markets.

Critics, particularly the trade unions, look at the issue differently. They argue that the EPF scheme, which from a welfare perspective has the potential to be a substantial social security measure, is being straitjacketed in a market framework. They argue that the EPF scheme is in a class of its own and cannot be compared to other savings instruments because of its specific characteristics. Unlike other savings instruments such as bank deposits, for instance, which are comparatively of shorter terms, workers' contributions to the EPF are made during the course of their entire career. That is, they are almost perpetual savings, often lasting as long as 30-40 years.

Moreover, EPF contributions are mandated by law. Although the element of compulsion on workers to make their contributions is balanced by social security considerations, the fact remains that this feature makes comparison with other savings schemes illogical and unfair.

The EPFO services three schemes with a total corpus of 1.28 lakh crores (as on March 31, 2004). The EPF, with a total corpus of 71,839 crores, is obviously the most important. The EPFO also manages the Employees Pension Scheme, which was started in 1995 when the older Family Pension Scheme was amalgamated into it. The EPS now has a corpus of more than Rs.50,000 crores. The Employees' Deposit-linked Insurance Scheme, with a corpus of nearly Rs.3,000 crores, is also managed by the EPFO. The trade unions have been arguing that the government has tended to use the EPFO corpus to finance its own expenditure instead of participating actively in the schemes to strengthen them as social security measures.

The trade unions also insist that while using the EPF as a cheap source of funds, the government has kept a tight leash on the EPFO, preventing it from working independently to further the interests of workers. It is significant that the government has tapped more than 85 per cent of the corpus of Rs.71,839 crores from the EPF scheme. These funds have been invested in the Special Deposit Scheme (SDS) that was instituted in 1975, Central Government Securities and government-guaranteed securities.

Moreover, the difference between the interest rate on the SDS (the return offered by the government on funds it borrows from the EPFO) and the return on the EPF has narrowed gradually, resulting in the seemingly unviable situation the EPF is in today. For instance, in 1975, while the SDS offered a return on 10 per cent, the EPF offered 7 per cent returns to workers, implying a differential of three percentage points. The differential narrowed to about 1.1 percentage points in 1984-85; and today, while the EPF promises a return of 8.5 per cent to workers, the government offers a return of only 8 per cent on what it borrows from workers through the EPFO.

It is also significant that even as it was lowering the rate of return on the SDS, the government also mandated that an increasing portion of the funds in the EPF be deposited in the SDS. In 1975-76, 20 per cent of the EPF funds were mandated by the government to be invested in the SDS; this increased to 25 per cent in 1979-80 and 30 per cent in 1985-86 and touched 55 per cent in 1994-95, before falling to 30 per cent in the following year. In effect, the grouse of workers that the government acted as a bania whose sole aim was to mobilise funds at the lowest cost is not without basis. Not surprisingly, agitated workers feel that the government, instead of acting as a guardian of the working class, treats them as a cheap source of funds.

THE legacy of the EPF scheme can be traced to the labour movements of the 19th century when workers demanded measures that offered protection in the workplace and old age benefits. By the end of the 19th century these measures were implemented in the United Kingdom. Although the U.K. government introduced the General Provident Fund for government servants in the early 20th century, essentially to satisfy British employees working in India, the Indian industrial working class remained totally outside the purview of these benefits until after Independence.

W.R. Varadarajan, secretary, Centre of Indian trade Unions (CITU), observed that the U.K. government, in fact, started the contract system in order to evade making contributions to welfare schemes for Indians in government services. "That legacy," he said, "continues today with the government being the largest employer of contract labour in the country."

The genesis of the EPF in India can be traced to 1947, when the conciliation board for workers in the coal industry recommended that a provident fund scheme be initiated in the industry. The Coal Miners' Pension Fund Scheme emerged from this in 1948. In 1951, the government passed an Ordinance for a provident fund scheme. In 1952, Parliament passed legislation that paved the way for the Employees' Provident Funds and Miscellaneous Provisions Act.

The trade unions had, since the days of British colonial rule, demanded a comprehensive social security scheme for workers, one which would provide better pay, healthier working conditions and some succour in the twilight of their lives in the form a pension scheme. Although the passage of a contributory scheme fell far short of their aspirations, it nevertheless was a major victory for the Indian working class soon after Independence. A crucial drawback was that the schedule to the legislation provided for the scheme being applicable only to industries "notified" by the government, which curtailed its coverage. In 1952, when the legislation took effect, the scheme was applicable to only six industries notified by the government. This fell far short of the workers' demand that the legislation be applicable universally to all sections of the working class. Another constraint was the low level of contributions to the EPF fixed for employees and employers. In 1952, contributions of workers - with a matching contribution by employers - was fixed at 6.25 per cent.

However, under pressure from the labour movement, particularly from organised sections of the working class, both the coverage of the scheme and level of contributions increased over time. By 1961-62, as many as 61 industries were covered by the EPF Act. In 1962, while most industries required the EPF contribution to remain at 6.25 per cent of their wages, workers in a much smaller group of establishments, classified as "notified establishments" by the government, were required to make contributions at the rate of 8 per cent of their wages.

In 1988, all establishments were required to make contributions at the rate of 8.33 per cent. By 1981, industries that were notified numbered 172, making workers in them eligible for PF contributions. Differential rates of contribution were introduced again in 1989 - at the rate of 8.33 per cent and 10 per cent. The government's rationale for the differentiation was that some industries were not strong enough to bear the burden of making these contributions. In 1997, the differential rates of PF contributions were changed to 12 per cent and 10 per cent. Currently about 30 per cent of the workers enrolled with the EPF scheme contribute at the rate of 12 per cent, whereas the remaining 70 per cent contribute 10 per cent of their wages to their EPF account. Since 1995, contributions diverted from the EPF to the Employees Pension Scheme (EPS) is 1.16 per cent.

Varadarajan said that the trade unions wanted the pension scheme to run on separate contributions from workers and employers instead of funds diverted from the EPF. Moreover, the trade unions wanted the government to participate in the pension scheme as a third partner by making a matching contribution. We are demanding the schedule to the EPF Act that hinders the universal application of the EPF scheme be deleted," said Varadarajan. This, he said, would bring all industries under the Act. Initially, in 1952, the legislation was applicable to establishments with more than 50 workers. The number of workers was subsequently reduced to 20. Varadarajan said that although the CBT of the EPFO had recommended that the number be reduced to 10, the government had refused to act.

"Although the EPFO is supposed to be an autonomous body, it is fully under the thumb of the government," he said. He pointed out that a recent recommendation of a committee of the Rajya Sabha had recommended that the status of the EPFO should be "clearly defined" and it should be given greater autonomy.

The CBT should be free to determine the investment pattern, coverage and the terms at which benefits are extended to workers, Varadarajan said. He points out that in the last two years the government has not cleared decisions taken by the CBT.

In 1999, the Union Labour Ministry appointed a task force on social security, headed by S.K. Wadhawan. The task force recommended that the interest rate be divided into two components. One component was meant to generate a real rate of return that represents a payment, which the lenders (workers) would receive for the use of their money. The other component was to be a rate of return that compensated for inflation. The rationale was that workers must get a net rate of return that covered the loss arising out of inflation. But the government, particularly under pressure from the Finance Ministry, never considered seriously the task force's recommendation.

M.K. Pandhe, general secretary, CITU, told Frontline that the unions were not against indexing EPF returns to inflation (see interview). But, he argued that the scheme must provide from substantial positive return in order to provide workers with a sum of money, which would rehabilitate them after retirement. He also said that the trade unions are willing to enter into bipartite discussions with the government to work out the details of an arrangement that would result in a fair method of indexing returns to inflation. Seen in the context of rising inflationary pressures, the timing of the EPF rate cut could not have been more disastrous for industrial workers. The inflation rate, currently at almost 8 per cent, as measured by the Wholesale Price Index (WPI), means that real returns are less than half per cent for EPF subscribers, clearly unfair to those making lifelong investments for their future.

POSING the EPF question in a vacuum, without taking into account the EPF's specificities and its potential as a device to enhance social security, is obviously counterproductive. Those sympathetic to workers' concerns argue that the issue needs to be posed differently, in fact even provocatively, if necessary. For instance, Union Finance Minister P. Chidambaram, by offering concessions recently on the Securities Transaction Tax (STT), agreed to suffer a loss of about Rs.6,000 crores (Frontline, August 13). In comparison, much has been made in the media about the fact that even the current payout of 8.5 per cent will result in a shortfall of more than Rs.200 crores. Trade union sources argue that a return of 12 per cent on EPF contributions would require government funding to the tune of only about Rs.3,000 crores, half of the give-away on the STT.

At the end of 2002-2003 (the latest figures available) nearly 30,000 establishments defaulted in their payments to the EPF, amounting to more than Rs.1,500 crores. Trade unionists say that imaginative solutions based on a careful arrangement of social priorities, coupled with a heavy hand on defaulting establishments, could have provided an alternative to the rate cut.

Critics of the trade unions have claimed that the organised workforce is the elite of the industrial workforce. However, the portrayal of the EPF as a special scheme for an "elite" among the workforce is obviously without any basis. Nearly 85 per cent of the members of the EPF scheme have a balance of less than Rs.20,000. In fact, their average balance is a mere Rs.3,100. In fact, 99 per cent of the members in the EPF scheme have a balance of less than Rs.4 lakhs.

The trade unions maintain that they have always fought for a universal PF scheme so that all workers enjoy retirement benefits after a long working life. They point to the fact that the EPF scheme has been extended to a larger part of the labour force mainly because of their struggles. They allege that the argument portraying organised labour as fat cats is a ruse to deny workers their due share.

The trade unions are demanding a drastic overhauling of the EPFO so that it is made to function democratically and with autonomy. The Finance Ministry, by virtue of its control over the purse strings of the Labour Ministry, frequently overrules the decisions of the CBT in the EPFO. In fact, Union Labour Minister Sis Ram Ola came under persistent attack from the Left in Parliament on the opening day of the monsoon session on August 16. He only offered the vague promise that the EPF rate would be hiked if there was a surplus in the coffers of the EPFO. He confirmed that the Finance Ministry had the upper hand in the issue by merely saying that he had asked the Finance Minister to reconsider the EPF rate cut.