Unfortunately, the line advanced, no doubt by the banking and the corporate lobbies, has been bought. However, the arguments for reduction are flawed on more than one count.

During the current fiscal, the cost of borrowing by the government has spiralled to 9 per cent-a leap from 3 per cent in 1981-82 to 4.7 per cent in 1991-92. The costliest form of government borrowing is ascribed to the accruals in small savings, thus "increasing" the sensitivity of the link between inflation and interest rates". The EAC had recommended that the interest rate be pegged at no more than 2 per cent or above the inflation rate. The government gains most from the cut.

The flip side is that the arbitrary cut may not bring about the desired results. On the contrary, it cannot but lead to a volatility in interest rates which may eventually affect economic growth. Household savings are on the decline: 24.7 per cent in 1997-98 to 22.5 per cent in 1998-99, with the current fiscal's estimate around 20 per cent. This should set alarm bells ringing. The overall savings rate in the household sector in Singapore, Korea, Japan and Thailand has crossed the 30 per cent mark. Household savings are the mainstay of growth, and policy makers can only afford to ignore this factor at the peril of the economy. Euphoria comes but too easily to the Indian psyche. The stock markets went berserk and the Sensex gained 177 points by the end of trading on February 28. However, this was short-lived and by March 2, it again lost 176.5 points to slide further by 60 points at midday on March 5. Stock markets in India are yet to attain maturity, driven as they are more by rumours than by fundamentals,besides being overly dependent on Nasdaq. Interestingly, in the US the federal interest cut effected in January this year did not boost Nasdaq as was expected. The government formula for the household sector-turn to equity-may be by proxy through the mutual funds route, as the dividend tax is proposed to be reduced from 20 per cent to 10 per cent. It is often forgotten that the average "risk averse" Indian investor has but recently outgrown the piggy bank depositors' mentality to be baptised into the equity cult. Mutuals funds have been Gods that failed: their lacklustre performance-barring exceptions-can hardly inspire confidence.

The period April-December 2000, witnessed a net steep increase in reductions and re-purchases and the net mobilisation of resources declined to Rs 6,856 crore from Rs 12,9193 crore during the corresponding period of 1999, despite increase in sales of debt funds. Another Quixotic idea floated is to tax the withdrawals from PPF: in no country are one's savings taxed. Comparison with NSS 87 (now replaced by NSS 92) is inept since deposits in the instrument qualified for cent-percent rebate in terms of section 80 CCA (since scrapped) of the Income Tax Act 1961. Tax Liability was, thus, deferred not saved. Again the tax free 11 per cent interest in PPF is just in the nature of "illiquidity premium" as this gets re-invested.

The EAC formula, as aptly pointed out by S S Tarapore, eminent economist and former deputy governor of Reserve Bank, should have recommended a calibrated approach by using a five-year moving average inflation rate with a distributed lag for weightages for each year, to avoid volatility.

Again it is illogical to treat the interest rates in national savings instrument to serve as a bench mark for such rates by banks or financial institutions. After all, the interest rates for the national savings instruments cannot even remotely be equated with LIBOR (London inter-bank offer rates). Nor can these rates be "market driven" as these were never intended to. The two just cannot be interlinked. There would be monetary imbalance as tax-saving bonds issued by IDBI/ICICI offer 10.5-11 per cent yearly coupon in addition to tax rebate under Section 88 of the IT Act 1961.

Another point is that 80 per cent of the proceeds of the national savings instruments is earmarked for the states for development purposes. Reduction in the interest rates affects the already cash-starved states. It is often argued that the funds are misused by state governments to meet their revenue expenditure, like payment of salaries and allowances to their own employees.

But surely that is no reason to abandon the institution of the national savings organisation which celebrated its golden jubilee in 1998. Could there ever be a mindset more perverse?

Such non-plan expenditure can be closely monitored by the finance ministry by deputing special task teams. On the other hand, these is no reason why instrument should not be accorded the infrastructure status to qualify for tax exemption under Section 88 up to the entire ceiling of Rs 80,000 per year. This point, in the absence of an organised lobby, has received scant attention. This is in sharp contrast to the system in other developed countries. The Japanese postal deposits aggregate to over $3,000 trillion, thus, making it the largest savings institution in the world and providing a comfortable cushion to the Japanese ministry of finance. In UK Chancellor Kenneth Clarke raised the target of national savings in November 1993 budget to £300 million and in the first three months of 1994, a sum of £906 million was mobilised in tax free pensioners' bonds. The government, therefore, need not be paranoid about small savings contributing to the fiscal deficit-now that the proceeds have been de-linked from theConsolidated Fund of India.

Instead, the finance minister should finetune his antennae to ground realities.