The finance ministry is planning to push for a 50-100 basis point cut on all administered interest rates in the forthcoming budget. But to quell rumblings among the salaried class, the finance minister may announce a reduction in income tax liability to go with it.
Despite the stiff opposition put up by several states on the move, which they feel will hurt the middle class most, the finance ministry plans to slash interest rates on all saving instruments, like Public Provident Fund, Government Provident Fund, special deposit schemes and the various time deposits in the post office savings bank.
The government feels that opposition to the rate cut will not be substantial because the inflation rate which was averaging 5 per cent at the beginning of this fiscal year and has declined to less than 2 per cent now, and gives the depositors the same or better real rate of return even after the cut.
The calculation is that this budget therefore presents the best opportunity to slash rates and get a welcome reprieve for the government's interest bill, which in spite of last year's cut is put at Rs 1,12,300 crore in the budget estimates.
The YV Reddy Committee report to free interest rates and make the states foot the entire cost of servicing the instruments is not expected to get off the ground soon, and so the Centre will have to go in for an announced cut in interest rates.
For the ministry, the cuts are necessary in the next fiscal to counterbalance the increase under several expenditure heads.
This includes a sharp increase in Plan support by almost 19 per cent to Rs 1,13,000 crore from Rs 95,000 crore allocated for 2001-02, the 10 per cent increase in defence outlay to Rs 69,000 crore, and the sharp one-time rise of about Rs 13,000 crore in the subsidy bill due to the dismantling of the oil pool account. This will swell the Rs 27,845 crore subsidy bill by almost 50 per cent.
In addition, the other components of non-plan expenditure, like the Rs 35,000 crore spent on wages and pensions will increase by a few hundred crore in the next few days when the next instalment of dearness allowance for central government employees is announced.
The government has to make some provision for the recently announced voluntary retirement scheme package also. All this as revenue collections are below even last years' level.
Though the interest liability of the Centre for small savings is less than 20 per cent, the rest being on various treasury bills, a cut in rates therefore means the fresh liability on existing small savings will be calculated on the lower rates. That gives the Centre a leeway of about Rs 10,000 crore, which is a substantial savings.
