Finance
Minister's Speech - Part A (contd...)
Pension Reforms
83. The Central Government pension liability has reached
unsustainable proportions: as a percentage of GDP, it has risen from
about 0.5 per cent in 1993-94 to 1 per cent in 2000-2001. As such it is
envisaged that those who enter central government services after October
1, 2001 would receive pension through a new pension programme based on
defined contributions. In order to review the existing pension system
and to provide a roadmap for the next steps to be taken by the
Government, I propose to constitute a High Level Expert Group, which
would give its recommendations within 3 months.
Interest Rates
84. I have drawn your attention to the increasing share of debt
service burden in the expenditure budget caused by rising government
debt and exacerbated by the prevalence of high real interest rates. Most
interest rates in the economy are now market determined. But, their
movement downward is constrained by the rigidities inherent in the
administered interest rates governing the contractual saving sphere i.e.
Provident Fund and Small Savings Schemes. I have examined this issue
very carefully. I find that the interest rates provided in all these
schemes seldom exceeded consumer price inflation by more than 3 per cent
between 1980 and 1998. Since then, this difference has risen to 6 to 8
per cent. Not only are such high real interest rates putting an
unsustainable burden on both Central and State Governments but the
resulting high cost of capital is also inhibiting economic growth all
round. I am therefore reducing most administered rates by 1.5 per cent
as of March 1, 2001. Government guarantee and tax incentives for these
schemes will continue. For the future, I propose to explore a better
system for the determination of these rates. I propose to appoint an
Expert Committee to provide recommendations on this issue.
85. The benefit of reduction in interest rates on Small Savings
Deposits will be fully passed on to the States. This will reduce their
borrowing cost from Small Savings by 100 to 150 basis points. In
addition, I am also reducing the interest rate on loans portion of
Central assistance to State Plans by 50 basis points. Alignment of
interest rates on GPF by the State Governments along with the reduced
provident funds interest rates at the Centre will further reduce the
interest burden of State Governments. Moreover, because of the
anticipated increase in gross tax collection of the Centre, devolution
of central taxes to States is expected to increase by over Rs 9000 crore
in 2001-02 over the current year. All these measures will help in
reducing the debt burden of the States and improve their fiscal
position.
