New Delhi, Feb. 16: The government is mulling a proposal to issue long-term infrastructure bonds with a maturity period of 15-20 years.
Although the government is also considering the option of paring the number of tax- saving schemes, there is a feeling that a new long-term instrument is necessary. The Centre needs to raise money for long-gestation infrastructure projects like highways and airports.
The government's gilt offerings in recent times have been accepted by the market at rates which are quite high. It consequently wants to reach out to retail investors who would be willing to invest money at rates which are lower than the 7 to 7.5 per cent now ruling in the gilts market.
The instrument could be made attractive to the middle class retail investors as well as to companies seeking tax shelters by offering saving on it.
However, the problem for the government is that the Employees Provident Fund (EPF) pays a 9.5 per cent rate of interest. This makes it difficult to offer and even price most of the existing range of small savings instruments, including the senior citizens savings scheme, which offers a return of 9 per cent.
This implies that the flow of funds into the EPF scheme will increase to the detriment of other schemes. At the same time, any bid to raise small savings rates in order to help the schemes remain popular, would mean higher interest rates for states which access small savings for their borrowing programmes.
States are, in any case, constantly moaning about the high interest rates they are being asked to pay the Centre on loans from this and other schemes and any attempt to raise their indebtedness to please voters would be politically unacceptable, though certainly a popular trade off.
Top finance ministry officials said the higher rates being offered by EPF could well see other schemes 'dying a natural death ' something which we have wanted for some time anyway.'
But new offerings like the infrastructure bonds too may be impacted in the process as the investing middle class is expected benchmarking all its investments by the EPF rate.
"One way out of such a mess is to take a fresh look at reports which have been gathering dust for some time ' these call for linking infrastructure bonds with black money amnesty schemes," said officials.
However, the government is not much in favour of amnesty bonds as these are hard to justify politically, especially to the honest taxpayers.