Is the government justified in cutting rates on EPF?

I think it is justified for two reasons. Firstly, it reduces the government burden. EPFO manages Rs.11.50 trillion as of date or nearly $150 bn. If rates are cut by just about 40 bps to 8.1%, government saves Rs.4,500 crore per year. Ideally if the rates are cut to a more realistic 6.5%, the savings would be Rs.22,500 crore per year Even at 6.5%, investors earn 13.5% yield in 30% tax bracket and 10.5% in the 20% tax bracket. That is awesome returns.

How does EPF distort bond markets. This attractiveness crowds out private sector borrowing. This stymied the growth of the debt markets in India and emergence of a credible yield curve. Secondly, India is the only country where long term funds go into debt and short term funds go into equity. Ideally, PFs must invest a larger chunk of the EPF corpus (beyond 15%) in equities and returns should be market driven.