Aligning returns on Small Savings Schems with market interest rates - Decision likely by March 2012

With declining small savings collection, the Finance Ministry is likely to decide by the end of this fiscal on aligning returns on such schemes with market interest rates, as recommended bya government panel.
"We are looking into the recommendations of the Shyamala Gopinath Committee and a decision will be taken by March end," said a senior Finance Ministry official.
Small savings schemes run by post-office, which are a major source of government's borrowings, are loosing sheen as interest rates offered on bank deposits are more attractive. Rates offeredby banks are on rise ever since the RBI has been increasing its key policy rates.
The Gopinath Committee has suggested various measures to make the schemes popular, including aligning the interest rates to market and bringing interest rate on post-office deposits up to par with a saving bank account.
"Benchmarking of interest rates on small saving schemes deposits to rates of Government securities (G-secs) is being actively looked into," the official added.
He said the thinking in the government was to have a floating rate of interest on such savings. "We are looking at combining some of the schemes into oneand the rates will be revised every year," he said.
The returns on small savings, like post office time deposit schemes and Monthly Income Scheme, vary between 6.25- 8 per cent. While savings banks accounts fetch a interest rate of 4 per cent calculated on daily basis, a Post office savings account gives an interest rate of 3.5 per cent annually.
Aligning these rates to market rates or Government securities will take the returns to over 8 per cent.
The government had to increase its market borrowing programme to make up for the shortfall in collections from the National Small Saving Fund (NSSF).
The Centre had initially estimated that NSSF would yield around Rs 24,000 crore, but there was net outflow of Rs 35,000 crore from the corpus during April-September.
Reforms in the small savings schemes is long due as the government hasnot acted on similar recommendations of Y V Reddy Committee report submitted in 2001.
Besides other recommendations, the Gopinath Committee had suggested that interest rate for one-year small deposit scheme should go up to 6.8 per cent from 6.25 per cent and introduction of 10-year National Saving Certificate scheme.
The official also said the issue regarding taxing returns on the small savings schemes, would be considered by the government while firming up the Direct Taxes Code (DTC), which seeks to replace the Income Tax Act, 1961.
Source : The Economic Times, October 23, 2011