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Govt holds small savings rates steady

Mumbai, March 12: The government has left interest rates on small savings unchanged for now, a move that will help rate-squeezed investors breathe easy.

“There will be no change for a while in the interest rates on small savings,” secretary (expenditure and budget) D. Swarup said after a meeting of the advisory panel, chaired by Reserve Bank of India deputy governor Rakesh Mohan.

Few were surprised at the outcome. A government up for re-election cannot slice rates on the politically-sensitive small savings ahead of the general elections. “Otherwise, it would have been a political suicide,” analysts said.

“It is an important issue and we had fruitful discussions,” chief economic adviser Ashok Lahiri, a member of the panel, said about market stabilisation bonds the government expects to launch over the next few months.

There was speculation in October last year that returns on small savings schemes would be brought down, but the government later stepped in to reassure it would not happen.

In February last year, finance minister Jaswant Singh indicated that high rates on small savings acted as a barrier to lowering overall interest rates in the economy. To follow up on this realisation, he cut interest rates on provident funds and post-office schemes by a full percentage point from March 1 last year.

The interest rate on small savings came down to 8 per cent from 9 per cent. The minister argued that the real rates on these schemes was still 6.3 per cent annually. This was much higher than it was in 1991-92 to 1995-96, a period when inflation was spiralling.

While making these cuts, the finance minister did not withdraw tax exemptions on small savings, as recommended by the Reddy committee and the Kelkar taskforce.

Since a slash in interest rates was not a politically palatable decision, the government decided to humour senior citizens by announcing a special scheme for them.

In his budget proposals for 2003, the finance minister announced that LIC would launch Varishtha Pension Bima Yojana, a scheme that gave individuals over 55 a 9 per cent return on a lumpsum amounts deposited.

Even before Singh, his predecessor Yashwant Sinha had reduced the interest rate on small savings to 9 per cent from 9.5 per cent. The government snipped the rate by an average of 50 basis points in budget 2002.

The labour ministry, however, retained the interest rate on Employee Provident Fund at 9.5 per cent. During the vote-on-account presented last month, Singh tried to keep senior citizens happy with Dada-Dadi bonds.

Scheduled to be launched next month, these bonds were unveiled as part of Singh’s January 9 mini-budget. They seek to cushion pensioners who have been hit hard by the falling interest rates over the past few years.

To support LIC in 2004 for its Varishtha Yojana, the finance ministry decided to increase the subsidy on the scheme to Rs 150 crore in the next financial year.

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