It is commonly believed that financial market scams originate due to lack of appropriate regulation. Less appreciated is the reality that such scams, at least in developing economies, and especially in India, originate in the public sector; even less recognized is the reality that such scams invariably tax the poor to subsidize the rich. The Public Provident Fund (PPF), as currently administered, is one such scam.

The PPF scheme is a fantastic subsidy for those allowed to enter its privileged gates. This is so for several reasons. First, and most importantly, these schemes are not for retirement for poor old age but a preferred investment vehicle. Most PPF holders are allowed to exit earlier for any number of reasons - housing, education, marriages, funerals. Most of them do exit before retirement - so it is brazen lie that such schemes are for the post-retirement years.

Second, only the organized sector has access to these schemes - about 25 million individuals. The total labor force in India - around 350 million. In other words, only members of the richest 5-10 percent of the population has been allowed to invest in the PPF. But what returns are available to this wealthy elite, about half of whom are sacrificing personal fortunes by working for the country and its government? Returns are commensurate to fit the sacrifice - tax free returns of 9.5 percent a year, or around 12 percent a year before taxes. And where does the government get the money to pay such juicy returns? It borrows from the public at less than half the rate the investor receives or around 5.5 percent per annum. Stated differently, there is a 6.5 percent subsidy for the rich financed by taxes obtained from the rest of us - the poor included.

This is not the first such blatant financial market scam run by the government of India. That credit goes to the UTI Unit 64 scheme where investors were compensated for lending to the government by a guaranteed return of 14 percent plus! Let us mull over this little statistic. If rich industrialists invested in an equity mutual fund run by the UTI , they were guaranteed a return of 14 percent! Given that the stock market has really gone nowhere for a decade (in 1994 the Nifty touched 1385, today it is 1400 or so) this was by far the best investment not only in India but the world. Obviously, this Ponzi scheme (borrowing Rs. 10 from one person and lending Rs. 14 to another) had to fail sometime and it did in Sept 1998 when this scam was revealed to the nation as an outcome of the East Asian financial crisis!

But what is a "poor" rich investor to do now? Why, she can invest in scam savings, somewhat misleadingly known as "small savings". Again, the government borrows at 5.5 percent and the rich individual obtains a higher return of 8 percent, or about 10 to 11 percent gross of taxes. Unfair, did you say? Maybe, but last year such savings of small people attracted more than a Rs. 100,000 crores, an amount equal to about 50 percent of the total financial savings in the system!

Surely, the correct solution is not to tax the poor, and especially not to tax it to pay the rich. But that is what rapacious governments do, "in the name of the poor". So the next time you think the PPF scheme should be allowed to continue in its present shape, just take a minute out to think - is it really fair to subsidize the rich? Why not let them get returns the old fashioned way - by earning it.