High interest rates will make economy sluggish: Jaitley
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