Is your provident fund part of an economy stimulus program?

Governments across the world want citizens to put their money to work. Money lying idle and earning interest is not desirable for a growth less economy. Bank of Japan introduced the negative interest rate also some European banks. Governments want their citizen to sweat their money out. It was surprising a stable and strong government in India dilly dallied on its provident fund policy recently.

Almost four months before there was a statement saying government intends to hold back 25% of the amount till the contributor attains retirement age. Then government went a step ahead, without even giving a waiting period, they declared 50% of the amount cannot be withdrawn till the retirement age. A budgetary announcement followed that 60% of the employee contribution will be taxed at the time of withdrawal. Later this was rolled back. Latest news is withholding of the amount is put off till April end and will be effective from May.

In this era of data analytics and scenario building tools tough to believe all these are disconnected events. Especially when the top minds in the world are advising this government.

A bit of calculation on back of hand told the real story.

The total size of the money with the PF is 128 Billion as on 2016 March. Assuming the 80:20 rule, 80% of this amount should be from 20% of the high income contributors. And if I am one in this group, I will certainly a bit restless once I see all these dillydallying. And if given a window, first thing in my priority list will be to take this amount out.

And what will I do after taking the amount out. It doesn’t make sense to invest in fixed deposit due to the tax outflow. The best choice for me is to pay back the home loan and reduce the size of the EMI. Suddenly I have free credit limit with bank and more risk taking ability since the outstanding liability is small. Now I think about investing in a second property!

Gotchaa!!...even a 20% contributing population withdrawing money is close to 20 billion USD. Come good times for the home loan segment and the reality, which will have a cascading impact on many other sectors.

What you see is not what you see and what you hear is not what you hear; when coming to smart and intelligent governments. 

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