With over 39 million subscribers, the employees provident fund (EPF) is acknowledged as the safest savings instrument for the Indian salaried class. To many, it provides an emotional financial sanctuary in the absence of any social security in the country. Because of its emotive appeal, the EPF interest rates - on which depend the post-retirement fortunes of millions of homes - has always been a politically sensitive issue.

The bitter wrangling between the trade union representatives and the trustees of the Employees Provident Fund Organisation (EPFO) across three meetings to finalise the EPF interest rate for 2004-05 has cast a pall of uncertainty among the EPF subscribers. The fourth, and hopefully the final, meeting on August 9, 2004, between the central board of trustees (CBT) of the EPFO under the chairmanship of labour minister Sis Ram Ola and the unions will end the incertitude.

The Congress-affiliated trade union, INTUC, is soft on the issue but other central trade unions have demanded the restoration of the EPF rate of 12 per cent from the 9.5 per cent at present. This would burden the fund with a monstrous deficit of Rs2,730 crore. On the other hand the EPFO wants to fix the rate at 8 per cent, which would leave the fund with a surplus of Rs154 crore. Even if the interest rate remains unchanged at 9.5 per cent, the fund would have a deficit of Rs927 crore.

Though EPFO is by far the industry giant in provident fund and pension plans, it covers only a minuscule four per cent of the country's population. Moreover, it does not seem to serve the role envisaged for it when it was formed in 1952 - to accumulate savings for employees' old age, with the added incentive of tax protection.

In reality, the bulk of EPF subscribers withdraw their money while still in employment. A look at the withdrawal figures shows that of the 39.4 million subscribers, over 85 per cent have balances below Rs20,000 - the average balance being a paltry Rs2,938. This clearly indicates that the kitty is seldom left untouched by employees to accumulate into an old age corpus.

The controversy over this year's interest rate began brewing with finance minister P Chidambaram's budget statement, "I do not propose to make any change in the existing rates of interest on small savings instruments. Consequently, PPF, GPF and the special deposit scheme (SDS) will attract 8 per cent interest this year."

The pegging of the interest rate for the SDS at 8 per cent, perhaps, accounts for much of the EPF's financial unviability, since 80 per cent of the fund's corpus of Rs128,036 (as of March 31 2004) is invested in the central government's SDS while the remaining 20 per cent is invested in public and financial institutions, central and state government loans and government-guaranteed loans, yielding equally unimpressive returns.

If the demand of the trade unions for 12 per cent interest is to be met, the interest rate of SDS needs an upward revision. Without this, it's obvious that a payout at 12 per cent or even 9.5 per cent this year will not be viable. But any alteration in SDS interest rates would require a radical overhaul of the government's own financing of these schemes.

The EPF, no doubt was constituted and continues to subsist towards realising a laudable social objective. Higher yielding returns are all the more desirable in India, which lacks a social security system. According to census 2001, there were 70 million people over the age of 60 in India and just about 10 per cent of them have their own income. In the absence of any social security, the remaining 90 per cent are forced to depend on others - mainly their children.

Technically, EPF can be helped to become self-sustaining. Since the population of the young in the country is growing at a much faster rate than that of the old - the birth rate being 2.58 per cent against the death rate of 0.85 per cent - a huge amount of money could be made to flow compulsorily into EPF accounts. However, in its present form it has many flaws, foremost among them being the fund's inefficient asset management that yields low rates of return.

To resurrect the EPFO, policy making, governance and fund management should move into the hands of financial experts instead of bureaucrats. Investment avenues and diversification of portfolio would obtain higher returns at the existing levels of contribution.

It should also come out of the administered interest rate regime. The government should stop using the EPF's fund for its fiscal management and allow the organisation to liquidate its investments instead of forcing it to hold its investments - essentially SDS's - till maturity. Better management of the corpus by experts would be in the interest of the markets, government finances and the intended beneficiaries - the employees.

At the moment, there could be three options available to EPFO. One, invest a part of the fund in the capital markets under a skilful fund manager. The conservatives would find this too high a risk for better returns. Two, the government agrees to provide a subsidy. This is quite unlikely, as it would escalate similar demands from other sections. Three, leave the existing subscribers to their fate and the ailing EPF.

Sane option would call for administered interest rates to be linked to the market, and for the abolition of the SDS. Most likely, the government will opt for the simplest option - do nothing and let the fund continue to ail due to excessive interference from the government and the politicians. And, may the devil take care of the hapless investors.