The Telegraph
Since 1st March, 1999
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Small savings rates spell big trouble

New Delhi, Feb. 14: The ticklish issue of small savings usually means big trouble for all North Block mandarins before the Union budget.

This year, states have been pushing for a cut in the rate at which they borrow money from small savings schemes such as Kisan Vikas Patra, public provident fund and national savings certificates. The central government administers these schemes and millions of ordinary Indians invest in it.

The Centre is also under pressure from the Left and from within the government for an upward revision in interest rates paid to investors in the schemes.

At present, the central government pays an average return of 8 per cent to investors and allows states to borrow up to 75 per cent of the money collected at 9 per cent.

If the Centre reduces the lending rate to 8.5 per cent as most states demand, it would ideally want the interest paid out to be reduced too.

But interest rates, including that of fixed deposits offered by banks, are rising on the back of inflation fears and steps taken by the Reserve Bank to harden rates.

Schemes such as the senior citizensí income plan offers a high return of 9 per cent. This makes it tough for the government to reduce interest on small savings, not to mention the fear of being criticised by its allies, the Left parties, on yet another issue.

States point out two things ' their average cost of borrowing from the market is 7.6 per cent, far lower than the cost of borrowing from the small savings fund. Second, the administration cost for the fund cannot be 1 per cent when banks lend at margins of just half a per cent and still make a tidy profit.

The Centre has come out with various figures and statistics to prove its rates are not usurious and that it is not raking in any profit. But most state governments are not convinced.

States are demanding they be allowed to borrow far more frequently from the market, which the Centre does not wish to allow as it fears states could crowd out industrial borrowers from the market and restrict industrial growth.

Policy decisions on statesí borrowing powers as well as rates at which they can borrow will be spelt out only after consultations with states. A committee, which has finance minister P. Chidambaram on it, has studied the issue in the past and is likely to continue deliberating on it too.

North Block officials say before a decision on reducing lending rates for states can be taken, the government has to decide whether to reduce the rate of interest paid out on small savings or to raise them or to maintain the status quo.

Since the choice is a tough one, fraught with political overtones, it will be taken by Prime Minister Manmohan Singh himself. But then mandarins say, whenever it comes to ticklish decisions, the best thing to keep it hanging.

If that policy is followed, the problem and the demands they stem from will be kept aside for another occasion. Perhaps, one, where public scrutiny will not be so intense.

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