Modi sarkar must move away from fund management
In less than two months, the government has shot itself in the foot on the employees' provident fund or EPF issue. It had announced three changes - all ill-thought-out - and had to back off after huge protests. One of the measures had even led to riots. Regarding another, it had to withdraw changes to the Budget within days of its presentation without being able to wait for the customary discussions that take place post-presentation and before its passing by Parliament.
Any government can make a mistake. But to make it thrice in a matter of two months, and to withdraw the changes without a whimper, points to something seriously wrong with the decision-making process. Is the government being ill-advised?
Appears so, even with two extremely bright people at the helm. Union finance minister Arun Jaitley is one of India’s best known legal minds who understands money. His deputy Jayant Sinha is someone who has spent a lifetime in the world of finance before joining public life. How could they get it so wrong? Not once, but thrice!
It is not for the first time that such ill-thought-out decisions have been made and then quickly reversed. It happened with the Minimum Alternate Tax (MAT). The government paid a heavy price. It took some serious selling by foreign institutional investors (FIIs) before the government woke up to correct the situation. It happened again when the finance minister travelling overseas had to step in and withdraw a new set of income tax forms that his tax department came up with.
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| Is the government being ill-advised on financial matters? |
Coming back to the EPF issue, the Modi government would do well to remember the collapse of the Unit Trust of India (UTI) back in the late 1990s. While it has never been acknowledged officially, it was one of the key reasons the BJP lost the elections in 2004.
Crores of middle class Indians, who largely invested in the erstwhile UTI that doled out guaranteed returns, never forgave the government, even though the mess at the UTI was not sudden but had built up over the years.
The EPFO is much bigger than the erstwhile UTI was. It is where crores of Indians park their life’s savings and expect the government to manage it for them. It gives guaranteed returns, sometime way more than what their own investments would garner. It is for this reason that the surplus it has is miniscule and hence the government wanted to lower the interest pay out that is set every year. Of course, it had to back down.
The government has to move away from being in the business of fund management. It hardly has the skill for it. Yes, it needs to provide a social security system to a large poor population that has no other recourse. It is with this in mind that the National Pension System (NPS) was created. But rather inexplicably, it has not been allowed to take off by the very governments that created it!
The NPS has not taken off because it has not been given the same tax treatment as the EPF or public provident fund (PPF). The returns you get if you invest in the NPS are not entirely tax-free. The government has to wean people away from investing in EPF by giving them a better alternative. The NPS is a market-linked product, it is the cheapest in terms of cost and has a far better chance to beat inflation because it has the ability to invest in equity as well, unlike the EPF where it is a fraction of the corpus that can be invested in equity.
The government has made it mandatory for at least the more recent entrants to its workforce to opt only for the NPS. Last year, it also allowed private sector employees to opt between the EPF or NPS. In the last Budget, it even hiked the tax breaks at the time of investing in the NPS by giving an additional Rs 50,000 limit. But none of this will work if you tell someone that once you have built your wealth over all those working years, you will tax a big chunk of your income.
Rather than bumbling away and squandering its political capital, the Modi government and its two bright individuals at the finance ministry would do well to focus on reforms that provide citizens with a better option. Else, it may have to pay a heavy price.