Poor bargain

Though the government has sought to give the impression that the one percentage point hike in interest on the Employees Provident Fund Organisation (EPFO) is a concession it has made for getting the Left parties to agree to far-reaching reforms like increasing the limits on foreign investment in the telecom sector, the deal is nothing but a bad bargain.

For the obvious reason that while the movement in telecom is non-existent, indeed even a backward step, the volte face on the EPF has far-reaching consequences.

Given that the EPFO handles around Rs 70,000 crore of provident fund money, the one percentage point hike means an extra outflow of Rs 700 crore annually.

Apart from the fact that the move is a volte face from the plan to bring EPF interest rates in line with overall interest rates, pandering to the demands of the middle classes (since they’re the ones who invest in the EPFO) in this fashion sends out the signal that the Budget is unlikely to do too much to reduce exemptions such as those on provident funds—why would you hike returns before the Budget and then take this back by way of lowered tax exemptions?

Apart from the provident fund, the EPFO also has an Employees Pension Scheme (EPS), which guarantees an annual pension to members that is roughly equal to the average salary drawn during the last year of employment.

The EPS already has a gap of around Rs 2,000–3,000 crore, getting larger with each passing year.

While the EPFO has been asking the government to reduce the overly generous benefits of the EPS, to ensure that it doesn’t default like UTI, this now looks unlikely, given how the government has bowed to pressure on the provident fund part of the EPFO already.

While the decision to hike FDI limits in telecom to 74 per cent looks progressive, as Finance Minister P Chidambaram admitted when he announced the new policy, it merely brings transparency to something that is already allowed.

That is, telecom firms which were always allowed to hold 49 per cent FDI had to go to the Foreign Investment Promotion Board to get permission to hold another 25 per cent through a series of holding companies.

All that’s happened now is that they no longer have to go to the FIPB but can hold their equity directly. But ensuring that the chairman, CEO, CFO, and CTO of the companies have to be resident Indians is surely retrograde if it is foreigners’ money which is running the company.

Ostensibly, this has been done for security reasons, but then is the government saying that only Indian citizens are honest or that only Indian citizens can be prosecuted if they violate Indian laws of secrecy?

Other restrictions now brought in, such as not allowing foreign companies to maintain/repair Indian networks, are equally retrograde, especially considering that there are no Indian companies with such expertise today since almost all networks are designed/built overseas—indeed, there would be almost no telecom company that has not had foreigners logging on to its network from abroad in order to maintain/repair it in the last one year.

Is this now to be considered a breach of security, which, along with other breaches, will trigger off the automatic cancellation of licences? Too many new riders have been brought it, giving excessive power to bureaucrats.