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RISING INFLATION, PROTEST AGAINST PROVIDENT FUND RATE CUT

Indian PM faces twin challenges

PALLAB BHATTACHARYA, New Delhi
Indian Prime Minister Manmohan Singh yesterday grappled with the twin challenges of rising inflation and the protests from Left parties, the chief prop of his coalition government, on the politically-sensitive reform measure of slashing the interest rate on Employees Provident Fund (EPF) of nearly 40 million salaried employees.
The decision to bring down the EPF interest rate from 9.5 to 7.5 percent, taken at a marathon meeting of the Central Board of Trustees of EPF Organization here on Monday, promptly drew storm of protests from CPI(M), CPI and other Left parties and their major trade unions which threatened to launch street protests later this month.
The decision to cut provident fund interest rate came even as the government is engaged in a tussle with the Left parties on the issue of hike in foreign direct investment in insurance, telecom and civil aviation sectors as well as increase in prices of petroleum products. The Left parties as well as main BJP-led main opposition combine are opposed to increase in FDI in the three key economic sectors and rise in prices of petrol and diesel and cooking gas.
The lowering of provident fund interest rate is the latest in a series of whammy for the salaried class in India. Last Friday, the inflation had reached a three-and-half-year high of 7.5 percent and the very next day, the country largest bank State Bank of India reduced interest rate on short-term deposit.
The implications of these developments are clear to the salaried class: inflation weakens the purchasing power on one hand and the saving is going to fetch less return.
In cutting the provident fund interest, the government has undoubtedly bitten the bullet as it took the decision ignoring the grave misgivings from the Left parties.
A number of meetings in the past of EPF Board of Trustees had failed to take a decision on provident fund interest rate as consensus eluded the Board members.
While the decision to cut provident fund interest may have signaled the government seriousness to take hard decisions and push ahead with reforms, the Left parties are not impressed.
CPI(M) leader Nilotpal Basu said the soft interest regime in the country is heavily loaded in favour of the corporate sector and biased against ordinary depositors.
CPI trade union leader Gurudas Dasgupta said will fight against this. This is outrageous.
The Left parties concern is understandable given the fact that its support base is mainly in the organised labour force which accounts for 30 million out of a total workforce of 400 million.
According to the finance ministry, the cut in provident fund interest rate will save the government exchequer Rs 721 crore.
On the inflation front, the government is clearly concerned prompting Manmohan Singh to hold two rounds of talks with Finance Minister Palaniappan Chidambaram and senior Reserve Bank of India officials Monday.
Rising prices of petroleum products, steel and iron have contributed to the general price hike but the main focus is on the petro-products.
The prime minister's party, the Congress, is worried the inflation could give its principal rival BJP a handle with populist appeal especially in the run up to the coming assembly elections in Maharashtra, Bihar, Jharkhand and Arunachal Pradesh states in the next seven to eight months.
The Congress and the Left parties expect the government to come out with effective steps to bring the inflation under control but options for Manmohan Singh may be limited, analysts say.
One of the suggestions, put forward by Petroleum Minister Manishankar Aiye and endorsed by the Left parties, is to review the excise and customs duties in oil sector in view of rising international prices of crude to prevent further pressure on prices of essential goods.
In a letter to Chidambaram, Aiyer proposed waiver of customs and excise for cooking gas and kerosene and replacing existing ad valorem duty structure on petroleum products.
But the finance ministry is not keen to shut out its revenue source as it gets
about Rs 9,000 crore in duty on crude imports.
Besides, the finance ministry is not willing to suffer fiscal and revenue deficit and violate the Fiscal Responsibility and Budget Management Act which stipulates the quantum of such deficit, analysts say.
Another reason why the government disfavours customs and excuse duty cut or waiver on petroleum products to cushion against rising international prices is that it might put pressure on the budgetary allocation to higher social sectors in keeping with the ruling coalition joint economic agenda, they point out.
Thirdly, the finance ministry is already under mounting pressure for huge additional funds to help states affected by drought and flood in various parts of the country.
A second option before the government to contain inflation is mopping up excess liquidity, one of the reasons cited for the rising inflation. But the problem is such a measure could push up the interest rates at a time when the economy is in need of fresh investment, analysts point out.