Building Infrastructure Through EPF Money? Economists Say Yes

Even as stakeholders mull over the long-term impact of equity investments, the government is now planning to use EPF monies to make longer term investments in infrastructure. On Friday, BloombergQuint reported that the Labour Ministry is considering using EPF monies to fund the National Investment & Infrastructure Fund (NIIF).

New Delhi-based economist and chairman of Oxus Investments, Surjit Bhalla, thinks it’s a good idea. “The investment of EPF corpus in the NIIF is a safer option compared to equity. It is always suggested to diversify the portfolio,” he says.

EPF is a retirement benefit scheme enabled for all salaried workers in companies with 20 or more employees, which works through mandatory contributions by employees and employers.

The Employees Provident Fund Organisation (EPFO) invests 65 percent of the over Rs 1.35-lakh-crore corpus in government bonds, 30 percent in corporate bonds and 5 percent in equities. The decision to invest in equities is a recent one and came after much opposition from the labour unions. EPF offers an assured return benchmarked to prevailing interest rates. In FY16, the payout was 8.8 percent.

Labour unions have argued that equity investments are risky and may hurt EPFO’s ability to offer assured returns. In FY16, the fund’s equity returns were negative, but last week the Labour Minister indicated a gain of 1.68 percent on equity investments up to 30 April 2016.

The government set up the NIIF in December last year, with an initial corpus of Rs 40,000 crore. A subsequent press release noted that the NIIF aims at maximising economic impact through infrastructure development in commercially viable projects. The statement also specified that the NIIF would aid greenfield (new), brownfield (existing) and stalled projects.

While Bhalla is backing the move to diversify EPF investments into infrastructure, ‎Chief Economist at India Ratings & Research, Devendra Kumar Pant says there is need for more clarity.

Will this investment be considered a government security, or will this be a different asset class that will be notified? If the NIIF investments are treated at par with government securities, then this will assure a marginal but fixed return for subscribers.

Founder of Equinomics Research & Advisory, G Chokkalingam takes a more aggressive stance. He suggests that the government must benchmark returns to existing savings schemes. He points out that “in order to make the NIIF investments feasible, the government must level returns to the provident fund (PF) or the national savings scheme.”

The National Savings Certificates scheme offers an interest of 8.5 percent over 5 years and 8.8 percent over 10 years. PF returns stand at 8.8 percent for FY16.

Labour union leader, DL Sachdeva of the Congress-affiliated All India Trade Union Congress (AITUC) told BloombergQuint recently that they would support the EPF investment in NIIF. The AITUC is India’s oldest trade union and claims a membership of 3.6 million workers.

If the government assures us a rate of return, we will also support the move to invest EPF corpus in equity.

DL Sachdeva

But as Bhalla points out, it is not feasible to expect assured returns when investing. “It will be unwise to seek an assured return from the government. This may lay the foundation for another UTI (Unit Trust of India) scam,” he says.