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