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The government has done well to increase the attractiveness of small savings deposits by hiking interest rates and amending some terms and rules pertaining to their operation. This was a natural corollary of the recent decision to deregulate the interest rates offered by banks on savings accounts.

The demand  to make small savings more dynamic has often been made and some committees, especially the Shyamala Gopinath committee set up after the 13th finance commission report, have made useful suggestions. The present decision is based on the recommendations of the Gopinath committee. Aligning rates on small savings with yields on government securities is a major reform and will introduce more dynamism and openness in an area of  finance which is important for both the people and the government.

The interest rate on post office savings deposits will be raised from 3.5 per cent to 4 per cent and the public provident fund (PPF) deposits will  earn an interest of 8.6 per cent against 8 per cent earlier. The investment limit in PPF, which is a popular scheme, has been increased. Some rules relating to post office savings schemes have also been relaxed. Post offices played an important part in catering to the savings needs of people because of their large network and easy accessibility.

The high savings rate in the country was once attributed to this. But they have recently faced stiff competition in attracting funds with the spread of banks which offered higher interest rates. Small savings had once amounted to about  Rs 1 lakh crore but have fallen recently. The government had to resort to public borrowing to make up for the shortfall in small savings.

The value of small savings also lies in the fact that they promote financial inclusion in a country where the regular banking system is yet to reach large numbers of people. Small savings deposits also finance the fiscal deficit. Their role is important at a time when growing deficit  is a matter of serious concern. Both states and the Centre will benefit from a stronger small savings regime. Even after the latest  reforms, small savings instruments will be subjected to much government control. For example, the post office savings interest rates will be notified by the government every year and will not be allowed to move with those in the banking system. But the fact that they will no longer be rigid is welcome.

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