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Government must review administered interest rates, says panel

India should review its administered interest rates on small savings as they are too high and are preventing banks from lowering their rates, a panel of experts said.

It said persisting with relatively high rates of 11 per cent on small savings instruments such as national savings certificates and the public provident fund prevented banks from lowering term deposit rates, thereby ensuring a higher interest rate structure for government borrowing and the private sector.

"We would recommend that the interest rates on these instruments should be lowered to a level no more than two percentage points above the inflation rate of the last six months," the prime minister's economic advisory council, which includes Reserve Bank of India Governor, Bimal Jalan, said in its report.

India's inflation rate as measured by the wholesale price index has been hovering around the 8 per cent level since January this year.

Finance Minister Yashwant Sinha had lowered interest rates on small savings including the public provident fund in January 2000 and cut interest on the general provident fund by 100 basis points in the 2000-01 (April-March) federal budget.

Indian corporates say their cost of funds are very high and have been demanding lowering of rates.

The key bank rate, used as a benchmark by banks to set their lending rates is currently at eight percent and leading state-run banks charge their best borrowers a prime lending rate of 12-12.5 per cent.

The report titled Economic Reforms: A Medium Term Perspective submitted to Prime Minister Atal Bihari Vajpayee urged the setting of clear targets to bring the fiscal situation under control over the next three to four years.

The report also said that the government should immediately initiate steps to control the runaway fiscal deficit.

The Indian government has introduced legislation in Parliament which seeks to wipe out its revenue deficit and slash its fiscal deficit to 2 per cent of gross domestic product by March 2006.

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