ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Small Savings and Market Mythology

The report of the Reddy Committee advocates market-determined interest rates on small savings, which it says are "high cost borrowings" for the government. In recommending reduction of interest rates on such schemes, the committee has overlooked the nub of the problem, namely, the government's fiscal profligacy gobbling up huge resources. Besides, fluctuating yields cause uncertainty for the small investor and can adversely affect growth.

Interest Rates on Small Savings and PF Schemes

The arguments for linking interest rates on small saving (SS) schemes to market rates and rationalising the tax benefits available to them rest on removing the government's arbitrary powers in a liberalised interest rate environment. If as a result of the suggested measures SS schemes become relatively unattractive, the government would need to borrow more from alternative sources. If total government borrowing is not kept in check, yields on government securities would go up and with it the interest rates on SS schemes would also warrant upward revision.
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