Small savings get a breather, no cut in sight

NEW DELHI: Small savers can take it easy. The United Progressive Alliance (UPA) government will not lower the interest rates on small savings instruments in the forthcoming Budget. The reason is self evident: inflation rate has inched up to 5% and this automatically reduces the real interest earned by small savers. The RBI has also projected a 5% inflation rate for this fiscal.
The administered interest rate on Public Provident Fund and a host of other small savings instruments is 8% currently. The rate will not be lowered in the Budget. Hard decisions like a reduction in the 9.5% interest paid to EPF subscribers — which includes a bonus component of 0.5% — will not be taken in the near term, said a top government functionary.
The government is in a spot as Left trade unions have pitched for restoring the interest on PPF, EPF and Special Deposit Scheme (SDS) at 12% as a measure of social security to the salaried class. Currently, the SDS fetches PFs an assured return of 8%.
The UPA government will not deviate from its commitment in the common minimum programme (CMP), which says that interest rates will provide incentives both to investors and savers, particularly pensioners and senior citizens. “The CMP will be the raga for this Budget and the finance minister will set the taal,� said a source.
Depositor interest in small savings instruments has not waned as it is perceived to be a safe and attractive investment option, particularly with tax concessions. However, it is expensive borrowing for the government, given that it can raise cheaper funds from the market.
The recommendations of the Rakesh Mohan panel, which reviewed the small saving interest rates and the structuring of these instruments, are broadly in sync with the YV Reddy panel on small savings. It is understood to have made out a case for lowering the administered interest rate on small savings and having fewer schemes. It has also reviewed the 6.5% tax-free savings bond and 8% taxable savings bonds scheme, besides the Varishta Bima Pension Yojana, which offers an assured return of 9%.
A key term of reference for the Rakesh Mohan panel was to suggest the criteria for fixing spreads on interest rates over the benchmark yields recommended by the YV Reddy panel. The idea is to avoid excess volatility in returns.
The Reddy panel recommended benchmarking of administered interest rate on G-sec yields, which was endorsed by the former NDA government. The last revision in administered interest rates on small savings instruments was in the ’03-04 Budget, when the rate was cut by 100 basis points from 9% to 8%.
Former finance minister Jaswant Singh defended the reduction in the interest rate, saying that high rates of interest in a low inflation regime was a disincentive for investment. With the inflation rate crossing 5%, the new government will find it easier to justify maintaining status quo on the interest rate on small savings.