Government has hiked interest rates on savings deposits, National Savings Certificate (NSC), Public Provident Fund (PPF), Kisan Vikas Patra (KVP), and Sukanya Samriddhi Account scheme by 30-40 basis points for the third quarter of this fiscal year. Government reviews interest rates on these schemes on quarterly basis. Since April 2016, interest rate on these schemes was kept in sync with market interest rates but now government has raised the rates because it needs more money finance widening fiscal deficit. The last revision was made in January-March quarter of 2017-18 when interest rate on schemes was reduced by 20 basis points.
Interest rate on PPF, Senior Citizen Savings Scheme, KVP, Sukanya Samriddhi Account Scheme and five-year NCS have been increased by 40 basis points, while that of one-year, two-year, three-year time deposit have been increased by 30 basis points. Kisan Vikas Patra is a saving certificate launched by India post in 1998 to encourage saving among farmers and rural areas. The hike interest rate on vikas patra will be duly beneficial because it will encourage the farmers to save more and give better returns on their saving deposits and on the other hand government will get money to finance fiscal deficit which has touched Rs 5.40 lakh crore for April-July or 86.5 percent of the budgeted target of the current financial year 2018-19. The money government which will get through vikas patra will be cheaper than what it could borrow from other sources.
Public Provident Fund (PPF) saving as well tax saving instrument was launched by finance ministry in 1968. In last four years interest rate has ranged from 7.6 percent to 8.7 percent, whenever government needs more money it raises interest rates on PPF schemes which encourages people to purchase this instrument. However, in long raising interest rates hurts government finances because it must pay more interest when these interments mature. National Savings Certificates (NSC) is an Indian government bond issued to encourage small savings. The purchase of this is also tax exempted under Section 80C of Income Tax Act, 1961. Most of these small savings are main source of investment for the rural population due to poorer accessibility of banks in rural areas of the country. Therefore these instruments of savings are issued through India post which has unparalleled network in rural parts of the country.
Small savings are major source to earn some extra money for lower middle class and poor people of the country. These schemes were encouraged by previous governments to improve the condition of urban lower middle class and rural people of the country. These savings are also important source of capital for government to finance fiscal deficits. There are other sources like government securities but those are more favorable when public finance is in good condition. At times like these when fiscal deficit is widening, deposits from small savings is the best source of capital.