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Economic survey urges lower interest rates

Interest rates on India's state-run small savings schemes are too high and need to be brought down in line with inflation to help stimulate economic activity, a government report said on Tuesday.

The statement gains significance as it comes two days ahead of the Union Budget when the government would have the option of cutting rates on small savings, a move that will lead to an overall fall in India's high interest rate regime.

Lower interest rates will also ease the government's debt servicing burden and help contain the fiscal deficit, the Economic Survey for 2001-02 (April-March), an annual report card on the economy, said.

"The fall in inflation unaccompanied by a compensating fall in nominal interest rates has also subjected the government to higher real interest rates along with the rest of the economy," the survey said.

The year-on-year inflation rate, measured by wholesale prices, has been at 20-year lows for several weeks, sparking calls from industry and analysts for lower interest rates.

"Making contractual savings subject to market related interest rates is therefore essential for containing the interest payments of the government as also for reducing interest rates for the economy," the Survey added.

Interest payments on domestic borrowings are expected to lop 69 percent off the central government's net revenues in the current financial year, it Survey said.

The suggestions in the Survey are similar to earlier comments made by Finance Ministry and central bank officials.

Expectations of cuts in the rates on small savings have driven trade in the bond market for several weeks pushing bond yields down to record lows earlier this month.

However, yields have since bounced up after the Bharatiya Janata Party, which heads the ruling central coalition, was routed in elections to four states this month.

While the BJP's defeat is not expected to unseat the central government, analysts fear that its leadership will be undermined and will make it difficult to take politically tough decisions such as lowering rates on small savings.

Interest rates on small saving schemes are among the few rates still fixed by regulators in India. All bank interest rates are set by individual banks, except the rate on savings account, which is set by the central bank.

The small savings schemes are extremely popular in India as they also offer tax breaks.

Net collections under these schemes are expected to total Rs 470 billion in 2001-02, taking the total amount outstanding under these schemes to Rs 3.05 trillion.

Lower interest rates are seen as one of the key elements in reviving sluggish economic growth.

India's gross domestic product growth slipped to 4 per cent in 2000-01 compared to 6.1 per cent a year ago. Growth is estimated to be around 5.4 per cent in the current financial year.

Reuters

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