PPF INTEREST RATE ENHANCED
NEW DELHI: Faced with a cash crunch, the finance ministry is moving a proposal to increase interest rates on small savings schemes such as Public Provident Fund and post office deposits but politics may play spoilsport.
Official sources told TOI that finance minister Pranab Mukherjee will decide on the proposal over the next few days as small savings instruments have lost out to bank deposits that earn higher interest. As a result, the government has been forced to borrow Rs 53,000 crore more from the market by issuing bonds, a move that can increase interest rates further and also upset budgetary calculations.
If Mukherjee approves an increase in interest rates on small savings, your PPF will fetch you at least 8.2%, instead of 8% now, while senior citizens can hope to earn around 9%. In addition, individuals will be permitted to park Rs 1 lakh in PPF accounts instead of Rs 70,000 at present. Similarly, post office deposits will fetch 50-70 basis points higher (100 basis points = one percentage point).
But politics over two schemes are holding back a green light from the finance minister. Sources said the finance ministry has received several representations from individuals urging not to abolish the Kisan Vikas Patra (KVP), while nearly 5 lakh agents have opposed the move to cut the commission on Mahila Pradhan Kshetriya Bachat Yojana (MPKBY) to 1% from 4%.
Officials in the tax department have complained that KVP has become one of the biggest instruments of money laundering, a concern which was even shared by a high-level committee headed by former RBI deputy governor Shyamala Gopinath. In fact, maximum instances of misuse of KVP have been found around Amritsar, pointing to the possibility of Pakistani funds entering India. So, it hasn't come as a surprise that a significant number of petitions for the scheme's continuation have come from Punjab and Haryana.
"The ministry has received representations from various sections. They have demanded that KVP should not be discontinued as it is linked to farmers while the reduction in the commission for MPKBY scheme has been opposed on the ground that it will hurt the income of women agents in rural areas," a source, who did not wish to be identified, said.
Mukherjee faces another dilemma as MPKBY was started during former prime minister Indira Gandhi's tenure which raises fears of criticism from within the party, especially because women agents will be affected. It's a different matter, however, that the agency is in the name of a woman but the person hawking the scheme is either the agent's husband or another family member.
It is likely that the finance minister, the government's key troubleshooter, will settle for reducing commission to around 2%, which will also ensure that investors do not lose out on returns as commission eats up a certain portion of the returns every time funds are deposited.
An expert panel headed by Gopinath had recommended moving from an administered price regime to a market-linked interest rate system for small savings schemes that would translate into higher returns for now.
It has recommended closure of only one existing scheme - KVP -- while recommending continuation of all other schemes with some modifications. The committee also recommended that the investment ceiling in the popular Public Provident Fund scheme be raised to Rs 1 lakh from the current Rs 70,000.
Finance ministry officials said increase in the PPF investment limit would help garner about Rs 5,000 crore in the coming quarter if the small savings reform plans were implemented. This would also help the government tide over the tight fiscal situation and reduce prospects for any further increase in its market borrowings. The government has recently raised its borrowing against the backdrop of slowing revenues and less than expected receipts from disinvestment in state-run enterprises.
The government panel had said the continued popularity of both KVP and NSC among the urban population who are not all small savers could be prompted by an incentive to avoid tax. "As compared to NSC, KVP is more popular as it is a bearer-like certificate due to its ease of transfer. It also has an in-built liquidity due to the regulated premature closure facility offered in the scheme. In view of the recent developments on Anti Money Laundering/CFT front, the committee recommends that KVP should be discontinued," the report said.
The committee had also said that 4% commission under MPKBY was very high and was affecting the viability of the National Small Savings Fund. "The committee recognises that the RD scheme requires considerable effort on part of agents in mobilizing monthly deposits. However, 4% commission is distortionary and expensive. The committee recommends that this should be brought down to 1% in a phased manner in a period of three years with a 1% reduction every year," the report said.
Latest data shows investors are opting for bank deposits due to the increase in deposit rates. Between April and August 2011, retail investors withdrew nearly Rs 5,500 crore from small savings deposit schemes in post offices and certificates such as National Savings Certificate. Small savings schemes, most of which are exempt from tax, had attracted investment of over Rs 25,000 crore in the same period last year.
Source : The Times of India, October 10, 2011
The Government wants to borrow more in the second-half of this financial year. Thus, fiscal slippage has come to the centre stage along with the discussions on controlling inflation. Spiraling and unabatedly continuing inflation is a concern. But fiscal indiscipline will very much exacerbate inflation.
The reasons the government cited for this was due to lower-than-expected cash surplus at the start of the financial year and also on account of revenue shortfall under the National Small Savings Fund (NSSF). Even though the government indicated that its fiscal deficit calculations remain unchanged, one of the major sources of the budget deficit — considered at the time of the last Union Budget — was small savings schemes of the government. A report of the Finance Ministry released recently said that net small savings deposits turned negative in the first quarter of 2011-12 and it has impacted government's cash management.
Interestingly, interest rates of many savings schemes offered by the government were static since 2003, while bank deposit rates moved up many folds. Various types of small savings schemes offer interest rates between 3.5 per cent and 8.40 per cent. The only scheme which offers a higher interest rate is the 5-year Senior Citizens' Savings Scheme (SCSS) which offers 9 per cent. However, for senior citizens, many public sector banks are offering much higher rates, adding another 25-50 basis points.
Further the government's borrowing programme surprised markets. The government announced its borrowing programme for the second-half of the current fiscal which was higher by Rs.52,900 crore over the market expectations. Yields of the benchmark 10-year Government Securities (G-Sec) had been in the range of 8.28-8.35 per cent till recently. After the announcement of higher borrowing programme by the government, the yields of the 10-year government bonds have shot up by 10 basis points to close at 8.44 per cent in the previous week. Last week, it moved up further to close at 8.55 per cent against 7.93 per cent a year ago. The 5-year G-Sec also was at 8.33 per cent last Friday against 7.75 per cent a year ago.
The deposit rates now hover around 8.50-9.25 per cent as compared to 7-8 per cent a year ago. However, some banks offer higher fixed deposit rates which are floating between 9.50 per cent and 10.50 per cent for various maturities.
Prime Lending Rates