High in­ter­est rates will make econ­omy slug­gish: Jait­ley

The Financial Express - - ECONOMY -

New Delhi, March 28: 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% on small sav­ing in­stru­ments trans­lates into an ef­fec­tive in­ter­est of 12-13% on de­posits. Cor­re­spond­ingly, the lend­ing rate, which is al­ways a notch above de­posits rate, would be 14-15%, he told PTI 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% tax-free in­ter­est on Pub­lic Prov­i­dent Fund (PPF) in­vest­ments, he said this trans­lates into an in­ter­est rate of 12.5% or 13%, in­clud­ing tax ben­e­fit.

“Where in the world you get 12.5% re­turn of in­ter­est? So if de­posit rates be­come 12.5%, what should lend­ing rates be, 14 to 15%? You will be­come the most slug­gish econ­omy in the world if lend­ing rates are 14 to 15%,” he said.

Jait­ley fur­ther 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%, on Kisan Vikas Pa­tra (KVP) to 7.8% from 8.7%, on girl-child sav­ing, Sukanya Sam­rid­dhi Ac­count to 8.6% from 9.2% and se­nior cit­i­zen sav­ings scheme to 8.6% from 9.3% with ef­fect from April 1.

Asked whether the gov­ern­ment had taken an un­pop­u­lar de­ci­sion, the finance min­is­ter said, “It would be most un­pop­u­lar de­ci­sion if In­dia’s lend­ing rates were 14 to 15%. 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% or 15%? Which de­ci­sion will be un­pop­u­lar?” he asked.

Jait­ley said In­dia must have mul­ti­ple prod­ucts, giv­ing a range of in­ter­est rates. “Even 8.1% rate is a very good rate of re­turns, much bet­ter than you get any­where in the world be­cause it is tax-free. 8.1% tax-free is 12.2%. It’s not a small rate of in­ter­est.

Finance min­is­ter Arun Jait­ley

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