Jaitley defends slashing of small savings interest rates

Justifying the sharp cuts in interest rates on small savings schemes, Finance Minister Arun Jaitley on Sunday said the country has to move to a lower interest rate regime to steer the economy towards a more efficient path of growth.

“In the direction that the economy is following, there cannot be a situation where the bank lending rates have to come down but the deposit rates are high. They both are linked,” Jaitley said at a press conference at the BJP headquarters here. Till recently, public sector banks were reluctant to bring down the lending rates as the deposit rates offered by State-run small savings schemes were higher than those offered by banks. Banks contended that their lending rates hinged on their borrowing cost, which was in a way dependent on the rates maintained for small savings schemes.

With the government now slashing the small savings interest rates, bank deposits will get attractive.

So far, the interest rates on small savings were set on an annual basis by a committee. The rates set were not entirely market-determined and a spread over the ruling rate on comparable government securities was used to determine the rates. Now, small savings rates are going to be reset on a quarterly basis and determined by market dynamics.

“An old formula, which has not been of our making, has been followed for many years. Interest rate on government securities are determined by the market. In the market-aligned interest rates, there is a spread given by the government on a range of schemes from PPF to the ones regarding senior citizens, the Sukanya scheme and so on,” Jaitley said.

“In the formula-driven interest rates, there is fluctuation. The interest rates had increased in the past and the government debt had also increased. Now, the interest rates have come down.”

Jaitley said this was the same formula followed during the UPA regime but the economy was sluggish then and interest rates were high, adding that even now, interest rates offered for small savings schemes are “lucrative”.

“Even now, the tax free interest rate is at 8.1 per cent, and if you add the tax slab, it is still in the range of 12-13 per cent. Nowhere else in the world is it this high, it is still lucrative and reasonably high,” he said.

Jaitley said there will be another thrust at getting the GST and the Bankruptcy Bills passed when the Budget Session of Parliament re-convenes in late April.

He said that the Bankruptcy Bill is in the final stages of discussion before the joint committee, which will propose the Bill with or without amendments to the House, where it will come up for consideration in the second part of the Budget Session.

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