Long overdue cut

But let's now work on social securityIn pure economic terms, the government deserves to be credited for its decision to cut interest rates...

But let8217;s now work on social security
In pure economic terms, the government deserves to be credited for its decision to cut interest rates on provident funds, and small savings by one per cent.

The reason is simple. If the economy as a whole was to move towards lower interest rates, vital for sustained investment growth, then interest rates on these savings just had to be lowered. In order to attract deposits, for instance, banks and corporates had to offer high interest rates, to compete with the interest paid on PFs and small savings. And since banks had to offer higher rates to depositors, naturally there was a floor below which they could not lower their lending rates. Most expect this cut to result in a lowering of interest rates by at least half a per cent now.

The move also makes sense from the point of view of the government8217;s own budgeting exercise. With few genuinely attractive investment options over the past several years, small savings have been over-shooting the target by awhopping margin. In 1998-99, for instance, the government8217;s estimate of small savings was Rs 21,640 crore but this was exceeded by Rs 8,000 crore.

And since the government pays this interest rate, it meant an additional burden on the exchequer. It is estimated that the rate cut will lead to a saving of Rs 1,000 crore in terms of interest outgo.

What remains unresolved, however, is the impact on middle-class investors who traditionally invest in these securities for their retirement. An argument given is that it is not the government8217;s job to provide investment alternatives to its citizens. That8217;s absolutely correct, but only in the case of developed economies with social security nets and old age pensions.

In countries like India, however, nothing of the sort exists. Forget social security, taxpayers don8217;t even get real value for the taxes they pay, with the government squandering this in unproductive subsidies which don8217;t even reach the targeted audience.

Basic amenities such as regular supplies ofelectricity and clean water and air are also luxuries that people have to pay extra for by buying power generators, inverters, air and water purifiers, and so on. As for the government having to spend a thousand crore extra because of higher PF rates, most citizens will say the government could afford it, if only it would cut its own wasteful expenses.

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And bank interest rates, it is true, could come down by a full percentage point if only banks were run efficiently. The cut in interest rates on small savings is all the more painful, coming as it does when state governments are increasing sales taxes on all products to raise a few thousand crore.

For the average middle-class citizen, who doesn8217;t understand sophisticated economic logic, lowering interest rates on savings is as bad as hiking taxes. If the government wants citizens to start appreciating its motives, then it had better start delivering on certain tangibles. Creating social security systems, and cutting its own waste, would be an admirablestart.