Interest hiked on small savings to beat EC date

Written by fe Bureau | New Delhi | Updated: Mar 5 2014, 06:41am hrs
CFate of Rs 1.5 lakh crore JNNURM Phase-II, FDI in railways on Cabinet agenda uncertain. Reuters
The UPA-II has been on an overdrive to dole out sops to lure voters in its last days, with the Election Commission expected to sound the poll bugle on Wednesday, which would reduce it to a lame duck. Last week and the previous one saw the Cabinet and its designated panels clearing proposals that would lead to a combined annual outgo of R23,000 crore. (see chart).

On Tuesday, the government raised interest rates by 10-20 basis points for small savings schemes up to a maturity of 5 years, but left the public provident fund rate unchanged at 8.7%.

Although the rate hikes are as per an earlier policy decision to align small savings rates with the yield on government securities, the timing indicated an intention to beat the EC deadline. Once the election schedule is announced, the model code of conduct comes into force, preventing policy announcements which could influence the electorate.

However, the government may have to reduce its ambition to take a few more policy decisions it had contemplated, as the EC is expected to announce the election schedule on Wednesday morning. Among these policy initiatives whose fate is now uncertain is the second phase of Jawaharlal Nehru National Urban Renewable Mission (JNNURM). JNNURM Phase I was part of the consumption-linked fiscal stimulus announced by UPA-II subsequent to the 2008-09 global global crisis.

As per the urban development ministrys plan outlined in a note that was meant to be considered by the Cabinet on Thursday, JNNURM Phase II would have an outlay of Rs 1.5 lakh crore to be spent over a period of 10 years, almost the double the Phase I outlay.

Phase-II of the mission wont be state-specific like its previous version where every state was given projects. This time, the states would be given grants on first-come, first-served basis. The government has also included the development of waterways, including grants for procuring boats, setting up of rope-ways in hilly towns and procuring buses for cities every year.

The government had extended the tenure of the mission for two years from April 2012 to March 31, 2014 as several projects were yet to be completed. The mission, at present, is being implemented in around 70 major cities. Phase 2 is expected to cover more towns.

Other important issues slated to be taken up by the Cabinet on Thursday are 100% foreign direct Iinvestment (FDI) in railways through the automatic route and FDI in construction.

The Department of Industrial Policy and Promotion (DIPP) has proposed to allow 100% FDI in high-speed train systems, suburban corridors, high-speed tracks and freight lines connecting ports and mines. However, existing passenger and freight network operations will not be opened to foreign investors.

At present, FDI is banned in the railways sector, except for mass rapid transport systems. Official sources were non-committal on whether these proposals could indeed be cleared by the cabinet on Thursday if the EC announces the poll schedule and impose the electoral code of conduct on Wednesday.

Despite Tuesdays decisions, rates on 5-year and 10-year National Savings Certificate (NSC) will remain unchanged at 8.5% and 8.8% respectively. Post office savings deposit rate will also be unchanged at 4%. The rate on 1-year and 2-year time deposits have, however, been raised each by 20 bps to 8.4%, while the rates were hiked by 10 bps each for 3-year and 5-year deposits to 8.4% and 8.5% respectively. The 5-year recurring deposit rate was raised from 8.3% to 8.4%, the finance ministry said in a release. With this, PPF will lose some competitive edge against EPF, whose rate was raised by 25 bps to 8.75% recently.

Analysts say the main reason for the change in small savings rates of 1-5 year maturity period was a rise in government bond yields on shorter tenures even as long-term rates remained more or less the same in the last one year.

The bulk of small savings collections are in five-year NSC and PPF. The government has budgeted net small savings collection of Rs 8,229 crore for 2014-15 as compared to a revised estimate of Rs 11,605 crore during this fiscal.