The finance ministry, according to an official, initially anticipated that reduction in interest rates would limit the increase in small savings accruals to around 10 per cent in 2002-03. However, he added, the growth worked out to be 30 per cent indicating that small savings is not elastic to interest rates.
The official said that small savings rate has been pegged at 8.5 per cent in tandem with the recommendations of the Y V Reddy Committee report on administered interest rates. He added since the mechanism of fixing the rates is transparent, there is possibility of rates being revised either way depending upon market conditions. The Reddy committee had suggested that interest rates on various small savings products like Post Office Savings Bank (POSB), Kisan Vikas Patra etc., should be benchmarked to GoI securities yield curve.
Interest rates on small savings have come down from about 12 per cent few years ago to 8.5 per cent. Finance minister Jaswant Singh, in his Budget in February, announced lowering of interest rates on public provident fund and small savings scheme by 100 basis points.
The ministry official was also critical of the labour ministry stance of not revising the interest rate on employees provident fund scheme. The labour ministry wants the government to continue to pay an interest rate of 9.5 per cent, though the scheme is earning only 8.5 per cent return. The government cannot subsidise the provident fund schemes, the official said.
In fact, the official stressed, provident fund schemes are not social security schemes as being made out by the labour ministry. You cannot provide security to someone from his own fund, the official argued.
Talking to FE, Dr B B Bhattacharya, head of the Institute of Economic Growth (IEG), said small savings have grown despite declining interest rates because of the collapse of the mutual fund sector. Investors confidence has been eroded and there is reluctance to invest even in bonds and debentures of public sector companies. Also, he added, small savings schemes are being preferred because they are giving higher returns than like instruments of the banking sector. The lowering of interest rates has, however, not impacted the investment level in the economy. Declining interest rates have also not helped in increasing corporate investments, Dr Bhattacharya added.