Finance minister Arun Jaitley defended on Sunday the decision to cut interest rates on state-run savings schemes, including the popular public provident fund (PPF), saying it was needed to lower bank borrowing costs and push economic growth.
His defence came two days after the government announced sharp cut in interest earned on a raft of savings schemes, including the Kisan Vikas Patra (KVP) and senior citizen deposits.
“The way economy is moving today, we cannot have a situation where lending rates are going down but deposit rates remain high.
Both are linked,” Jaitley said at the BJP’s national executive meet in the Capital.
“To make economy more efficient rather than sluggish, the country has to move towards lower interest rates in both.”
The decision has drawn strong reactions from not only the Opposition but also from the RSS-affiliated Bharatiya Mazdoor Sangh. Critics said lower earnings on these schemes could force millions of households to shuffle their savings portfolios.
Congress vice-president Rahul Gandhi had on Saturday described the move “as yet another assault on the middle-class”.
According to the new structure, investments made in PPF during April 1 to June 30, 2016, will earn 8.1% annually. The current rate is 8.7%. Investments in KVP will earn a return of 7.8%, instead of 8.7%, while senior citizen savings scheme of five years will earn 8.6% interest compared with the existing 9.3%.
Jaitley said the PPF interest rate at 8.1% remains reasonably lucrative. Since it is tax free, the effective earnings on PPF is close to 11.12%, he said.
The government announced in February a decision to move to a new system for interest rates on state-administered schemes, making these market-linked.
Market rates move in tandem with government bond rates that are on a downward trend now. Under the new system, rates will be revised every quarter, as opposed to the earlier system of an annual review.
“There’s an established old formula for the past many years. Government securities interest rate is market-linked, while it offers some subsidy for small savings such as PPF, senior citizens and Sukanya Yojana savings scheme from its own budget,” Jaitley said.
“Government takes debt from market and its rates do fluctuate and when interest rates were high, the burden was on the government. Now interest rates on government securities have come down,” he said.
Lowing of small-savings rates is expected to allow banks to pass on policy rate cuts by the central bank through lower lending rates.
Banks say they are forced to offer high interest rates to depositors to make it more attractive for people to park extra funds with them ahead of post office and other state-run schemes.
The Reserve Bank of India has cut the key policy rate by 1.25 percentage points in the past year while banks have passed on the benefit to borrowers by lowering lending rates by just 0.70 percentage points.
Middle-class Indians rely on small investments offered at post offices for social security and parking surplus cash.
Total outstanding deposits in small savings schemes stand at over Rs 9 lakh crore. Indians have been parking more than Rs 50,000 crore annually as additional savings in these instruments over the past three years. The government depends on this pool of money, also called the National Small Savings Fund (NSSF), to finance part of its budget.