EPF Cut, Covid, Inflation: All roads lead to ruin for the middle classes

Date: 16th March, 2022

Publication: The Quint

The employees' provident fund organization (EPFO) recently slashed key interest rate of the employees' provident fund for the year 2021-22 from the existing 8.5% to 8.1 %. This is the lowest rate in four decades, the last lowest rate was 8% in 1977-78. As per the EPF website https.www.epfindia.gov.in, subscribers enjoyed a 10% + interest rate from the years 1985 to 2001. Post-2001, the interest rates tapered down to 9.5 % and since 2005 the interest has been consistently below 9% except for 2010-11 when the EPFO's central board of trustees declared a rate of 9.5%.

EPF interest rate on one end, even the savings interest rates at the bank have been consistently been reduced by the government since 2016. The 5-year Senior Citizen Savings Scheme (extendable to 7 years), launched by the Manmohan Singh government for senior citizens to earn higher interest than the regular savings rate in August 2004. The inaugural interest rate was 9% for the fiscal year 2004-05.


From 2011, the interest rate on the scheme swelled to 9.3 % till 2015, post which the savings rate fell to 8.6% from April 2016 onwards. Today the interest on the senior citizen scheme is at 7.4% up to the quarter ending June 2021. The savings rate has fallen from 9% to 7.4% in less than five years nearing the levels of yearly inflation.

The Sukanya Samriddhi Account Scheme launched on 22nd January 2015 under the aegis of the “Beti Bacho Beti Padhao” campaign meets with a similar fate of collapsing interest rates. Starting with a fanfare of 9.1 % saving rate in the fiscal year 2014-15, today the scheme for the girl child only fetches 7.6%. The fall from 9.1 to 7.6% will be a steep decline in the government’s schemes.

Drastic reduction in the savings rates in the 1-5 years’ time deposits since 2016 had also affected the savings in the pockets of the people. As per the data released by the National Savings Institute under the Department of Economic Affairs, Ministry of Finance, Government of India, the time deposits of five years which stood at 8.3% in 2011 have now reduced to 6.7% as of March 2021 and as per the withdrawn proposal of 31st March 2021, the savings rate was to be reduced further to 5.8%.


A fact to be noted here is that the Manmohan Singh Government increased interest rates of 5-year time deposits from 7.5% to 8.3% in 2011 in the backdrop of the financial crisis of 2007-08 perpetrated due to the bankruptcy of Lehman Brothers, the global financial meltdown, and the US economic fallout. The then government increased the savings interest rates from the fiscal year April 2011 for all National Saving Schemes from the modest savings rates to the increase in the public provident fund rates.

Fuel prices have jumped from the highs in 2021 to the latest prices of 1 liter which stood in New Delhi at Rs 95.41, while the diesel price is Rs 86.67, in Kolkata is Rs 104.67, while diesel stood at Rs 89.79. The price of petrol in Mumbai is currently Rs 109.98, while diesel stood at Rs 94.1 as of 13th March 2022. The Ukrainian crisis threatens to increase petrol prices to record levels.


Coupled with that the galloping price of non-subsidized LPG has hit middle-class consumers hard, upsetting their budget of the month. The price in May 2020 stood at Rs 581.5 in Delhi but rose to Rs 884.5 by the end of 2021. As of today, the prices stand at Rs 899.50, Rs 926, Rs 899.50, and Rs 915.50 in Delhi, Mumbai, Kolkata, and Chennai respectively.

In 2021, the Indian middle classes joined the global bandwagon of investment into volatile cryptocurrencies. Tactical subscribers have claimed to be earning anywhere from Rs 200 to Rs 2000 (and more) per day by trading in digital currencies which helped them to pay for their daily household expenses. The huge surge in transactions and word of mouth made the digital currency spread like wildfire. As of January 2022, 450 million Indian investors are in cryptocurrencies, with nearly Rs 5 lakh crore invested in cryptocurrencies. The Union Budget 2022 spooked the subscribers by refusing to legalize cryptocurrencies and imposing a 30% tax on the gains/earnings along with 1 percent TDS (tax-deductible at source) for each transaction.

While the average inflation rate is well above 7.21% (1958 to 2021), the savings rates are hovering less than yearly inflation. The see-saw of inflation from the highs of 2012-14 to the lows in 2017-18 to the median in 2020-21 have impacted household budgets of the middle class. Basic food items like mustard oil are a classic example that has seen the prices rise from Rs 124.1 to Rs 167.1 from January to December 2021. Prices of the cooking oil are hovering around Rs 200+ for 1 litre as of today. The prices of basic vegetables onions and tomatoes have been inconsistent with highs and lows between Rs 40-Rs 100.

With extremely few options left for investment that promise a higher return than yearly inflation, all roads famously or infamously lead to the Indian stock markets for the middle classes. Investment in mutual funds, IPOs, and shares promise a higher return than inflation and have attracted fresh retail investors to the bull run at the stock markets. The exceptional run at the bourses since 2019 has raised the hopes of millions to earn more bang for their buck.


On January 14th, 2022, the Sensex climbed to a high of 61000+ points but a steady decline in market indices has plagued the stock markets despite the booster Union Budget of 2022 (though individual income tax remains unchanged) and a gradual decline in Covid-19 cases. The uncertainty of the Ukrainian crisis, the spike in oil prices have kept the stock market a mile away from another bull run and the middle class from adding to their savings.

The middle classes need a booster to make a comeback post the horrors of Covid-19 that impacted their livelihoods, businesses, jobs, and basic existence. The tax-paying middle-class needs relief from the government for being honest and compliant as good citizens. The middle class often foots the bill for the loan waivers of the poor and the corporate tax cuts of the rich. The Indian middle class without earnings or savings will not be in the best interest of the country.


This time has come to hail the battered middle classes, not in speeches but in benefits and actions.