High interest rates will make Indian economy sluggish, warns FM Jaitley

Justifying slashing of interest rate on small saving instruments like PPF, Finance Minister Arun Jaitley on Monday said interest rates in India are “extraordinarily” high and the country risks becoming the most sluggish economy if lending rates continue to rule high. The existing tax-free interest rate of up to 8.7 per cent on small saving instruments translates into an effective interest of 12-13 per cent on deposits. Correspondingly, the lending rate, which is always a notch above deposits rate, would be 14-15 per cent, he said in an interview here.

“On small savings, India’s interest rates are extraordinarily high. And high interest rate prevents growth,” he said. Citing the example of 8.7 per cent tax free interest on Public Provident Fund (PPF) investments, he said this translates into an interest rate of 12.5 per cent or 13 per cent including tax benefit.

“Where in the world you get 12.5 per cent return of interest? So if deposit rates become 12.5 per cent, then what should lending rates be, 14 to 15 per cent? You will become the most sluggish economy in the world, if lending rates are 14 to 15 per cent,” he said. Jaitley said no country can have “a system where lending rates are low but deposit rates are high. The two are interlinked”. The government had on March 18 announced cut in interest rate on PPF to 8.1 per cent, on Kisan Vikas Patra (KVP) to 7.8 per cent from 8.7 per cent, on girl-child saving, Sukanya Samriddhi Account to 8.6 per cent from 9.2 per cent and senior citizen savings scheme to 8.6 per cent from 9.3 per cent with effect from April 1.

Asked whether the government had taken an unpopular decision, Finance Minister said, “It would be most unpopular decision if India’s lending rates were 14 to 15 per cent. To destroy India’s economy would be the most unpopular thing to do. Low interest rate in the long run will help everybody.”

When a borrower goes to bank for availing home loan, “he should get it at 9 per cent or 15 per cent? Which decision will be unpopular”, he asked. Jaitley said India must have multiple products, giving a range of interest rates. “Even at 8.1 per cent rate is a very good rate of returns, much better than you get anywhere in the world because it is tax free. 8.1 per cent tax free is 12.2 per cent. It’s not a small rate of interest. The government, he said, has to create a mechanism where interest rate become more reasonable and those are transmitted by the banks. 

“And also don’t forget, the additional argument that you earned 8.7 per cent when inflation was at 11 per cent. When inflation is below 5 per cent, so actually the real rate of interest has gone up,” he said. 

Jaitley said the move to tax 60 per cent of withdrawals from Employees Provident Fund (EPF) was aimed at discouraging people from making lump sum withdrawals and spending all the money and it was instead aimed at encouraging them to invest in tax-free pension plans to make India a pensioned society.