Govt defends interest rate cut on small savings

Finance Minister Arun Jaitley says move to make economy more efficient

The Centre on Sunday defended its decision to slash the interest rates on small savings, saying that the move was made to make the economy more efficient rather than sluggish.

Addressing a press conference, Union Finance Minister Arun Jaitley said that despite slashing the interest rates, they are reasonably high and in fact are highest in the world at the present.

"There is an old formula which has been running since ages. It states that the government gives subsidies on interest rates, set by the market, on the government securities for small savings. The interest rate on government schemes is determined by the market. This is a market aligned interest rate in which a spread is given from the government budget," he said.

The Finance Minister said the present economic condition in the country doesn't allow the lending rates of the banks to go down whereas the deposit rates go up.

"In between the interest rates went high due to which the government debt also increased. Now, the interest rates have come down. The present economic condition in the country doesn't allow the lending rates of the banks to go down whereas the deposit rates go high," he said.

"So to make the economy more efficient rather than sluggish, the country has to move towards lower interest rates in those areas. So, the interest on government securities has also come down in the last few months. The only difference is that earlier it used to be determined annually but now because of the increased market fluctuations, these will be determined quarterly...Even today, tax free 8.1% interest, if you add tax slab to it, becomes 12-13%. Nowhere in the world tax rates is that high. It is still reasonably high," he added.

The ruling dispensation at the Centre had on Friday announced sharp cuts in interest earned on a range of state-run savings schemes including the popular public provident fund, the Kisan Vikas Patra (KVP) and senior-citizen deposits.

As a part of its February 16 decision to revise interest rates on small savings every quarter, the interest rate on Public Provident Fund (PPF) scheme will be cut to 8.1% for the period April 1 to June 30, from 8.7%, at present.

Similarly, the interest rate on KVP will be cut to 7.8% from 8.7%, according to a Finance Ministry order.

While the interest rate on Post Office savings has been retained at four%, the same for term deposits of one to five years has been cut.

A five-year Monthly Income Account will fetch 7.8% as opposed to 8.4% now. Girl-child saving scheme, Sukanya Samriddhi Account will see interest rate of 8.6% as against 9.2%.

Senior citizen savings scheme of five-year would earn 8.6% interest compared with 9.3%.

"On the basis of the decisions of the government, interest rates for small savings schemes are to be notified on quarterly basis," the order said announcing the rates for the first quarter of fiscal 2016-17.

Post Office term deposits of one, two and three years command an interest rate of 8.4% but from April 1, a 1-year Time Deposit will get 7.1%, 2-year Time Deposit will earn 7.2% and 3-Year Time Deposit will attract interest of 7.4%.