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| Government may soon free interest rates |
| Vrishti Beniwal & Dilasha Seth / New Delhi Oct 11, 2011, 00:38 IST |
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Interest rates on small savings are expected to go up soon, as Finance Minister Pranab Mukherjee may shortly approve the recommendations of the Shyamala Gopinath committee on freeing these rates. This could give a lift to the government’s dwindling small savings’ kitty, but might make financing of fiscal deficit expensive in future as these funds will be costlier for the Centre than market borrowings.
In the current situation, small savings may cost about 100 basis points more than what the government is paying on its long-term market borrowings, a finance ministry official said on Monday. “The move is not aimed at tapping public savings to finance fiscal deficit,” he told Business Standard.
The ministry is in sync with most of the recommendations of the committee and the new rates may come into effect this year itself. It has already concluded discussions with states and has got feedback of various stakeholders on de-administering small savings interest rates and linking them with the yields of government securities of comparable tenor.
Crisil said a hike in the interest rates with small savings schemes would attract more savings. “And the trade-off will reduce,” said D K Joshi, chief economist with the rating agency. Last month, the government had increased its borrowing target for this year by Rs 52,800 crore to Rs 417,000 crore because of a lower cash balance and dip in collections from small savings schemes.
Anis Chakravarty, director, Deloitte Haskins and Sells, said, “It may help to an extent in equalising interest rates of fixed deposits and small savings, but with high interest rates everywhere, the inflation will get institutionalised. I am skeptical if interest rates will ever come down this way. The government will not be able to tackle the fiscal deficit target this way.”
The Gopinath committee, set up for the review of National Small Savings Fund, had recommended discontinuation of Kisan Vikas Patra and introduction of a 10-year National Saving Certificate scheme, and linking small savings schemes’ rates with government securities in its report submitted to the finance ministry in June. It had also proposed increase in the ceiling on annual subscriptions in Public Provident Fund (PPF) from Rs 70,000 to Rs 1 lakh.
However, Madan Sabnavis, chief economist with CARE Ratings, said small savings continue to be a cheaper source of financing from the government even after raising interest rates for PPF and post offices. “Only increasing the interest rates will not help in boosting savings with PPF or post offices,” he noted.
“It has to be accompanied by other factors. First is increasing the limit on small savings deposits. Secondly, the government also needs to give a clear picture on whether small savings will remain tax free after implementation of Direct Taxes Code.”
NSSF does not contribute much to the government in terms of financing fiscal deficit. This fiscal, the Centre expected to get over Rs 24,000 crore from this fund against projected fiscal deficit of around Rs 4.13 lakh-crore. This much amount will also not be coming to the government because of dwindling small savings, the officials said.
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