After months of dithering, the government has accepted most of the recommendations of the Shyamala Gopinath Committee, which was set up at the instance of the 13th Finance Commission to review the parameters of the National Small Savings Fund (NSSF) and the various small savings schemes. The most significant of them is to link the return on the small savings instruments to market rates, a step that will have major implications for the finances of the Centre and the States. Surely, there will be greater transparency in interest rates as the small savings instruments are being benchmarked to yields on government securities, and this in turn will pave the way for a more cost-effective management of public finances at the Central and State levels. Presumably, the market-oriented rates on the small savings instruments will revive popular interest, which has of late been flagging as depositors started migrating to banks. Indeed, the Centre recently announced public borrowing of about Rs.53,000 crore over and above what was budgeted for to offset the shortfall in collections under various small savings schemes. Even with their new market orientation, small savings instruments will still be subject to government control, although to a lesser degree than before. The contrast with the banking system is particularly striking in one key area: while the interest rate on savings deposits with banks has been freed recently, that on post office savings bank deposits remains controlled, though it has been raised from 3.5 per cent to 4 per cent.
The committee has done well to recognise the role of the various small savings schemes in catering to the thrift needs of different sections of the population. Only one scheme — the Kisan Vikas Patra — has been recommended for closure. The most popular scheme, the Public Provident Fund, gets a substantial boost. PPF deposits will now carry an interest of 8.60 per cent instead of 8 per cent. More significantly, individuals can invest a larger amount, up to Rs.1 lakh, in a year and claim tax rebate under Section 80C of the Income Tax Act. At present, the ceiling is Rs.70,000. However, borrowing from the PPF has become costlier. Rules relating to post office deposit schemes have been relaxed, with the depositor given the option to close the deposit before maturity. The Senior Citizen Savings Scheme will continue to offer 9 per cent for investment up to Rs.15 lakh. The scheme, which was popular at a time banks were offering very low rates, is bound to be less attractive now. Small savings schemes will continue to be relevant as a means of furthering financial inclusion.