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Monday, Jan 14, 2002

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Savings on the block

COME FEBRUARY 28, patrons of small-saving schemes will be waiting with bated breath for what the Finance Minister has in store for them. Are they in for days of less money in their wallets? Will small-savings earn less or become hardly rewarding tax wise the next fiscal? These questions are not difficult to answer if the sequence of events is followed carefully. First it was the Parthasarathy Shome Committee, which, among other things, pitched for recasting or scrapping the tax concessions on small savings. Then came Dr Y.V. Reddy's report striking the same note. It also suggested benchmarking the interest rates on small savings to the average yields on government securities. Now comes the N. K. Singh Committee reiterating what its two predecessors said. Composed as it was mainly of key Finance Ministry officials, its prescriptions are sure to bewritten into the Budget. Given the sensitive nature of the recommendations, there is little doubt that the Finance Minister will have to do a lot of political balancing.

Fromthe investor point of view it may be hurting to see these tax concessions and exemptions go. But there is always a larger perspective that should not be lost sight of. The call of the economy and the fisc must override all other considerations. If the situation is serious enough to warrant a special effort of this nature, the Government must not hesitate. That it is profligate when it comes to non-productive expenditure is a different matter. If it thinks the return on tax-saving investments is unduly high, it must peg it right. If the administered rates are causing an unsustainable interest burden on the Government, it is time to bring them in sync with the market. Further, small-saving schemes suffer from problems of maturity mismatch vis-a-vis the Government's repayment obligations. In effect, they are ponzi schemes, where the repayment is from fresh collections and not out of the returns from investments.

To achieve higher economic growth rate, the country would require a higher savings ratio. The household sector contributes the most to the overall savings, which are around 23 per cent of GDP. Small savings play no mean a role in financing the fiscal deficit of the Centre and the States. Any deceleration in the inflow will therefore seriously tell on their finances. It is true investors have of late lost their appetite for risk and there are few safe investment avenues left. Yet, the Government has to tread carefully and not rush into policies that cause dissavings. Withdrawing all tax concessions in one stroke carries such a danger; phasing them out over a two-year period would be more prudent.

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