With high interest rates on small savings acting as a barrier to lowering interest rates in the country, the  finance minister on Friday lowered interest rates on Provident Funds and post office schemes by a full percentage point from March 1. Interest on all relief and savings bonds will be adjusted accordingly.

Announcing this, the finance minister however pointed out that the real interest rates on these schemes was still 6.3 per cent annually, or much higher than it was in the period 1991-92 to 1995-96 since inflation levels then were much higher.

To keep the elderly happy, however, a special scheme has been designed for them. The LIC will come up with a Varishtha Pension Bima Yojana, which a pensioner or anyone over 55 years can pay a lumpsum amount and get benefits at a rate of 9 per cent per annum.

The minimum and maximum monthly pensions that can be availed of under this scheme are Rs 250 and Rs 2,000 per month.

The difference between the 9 per cent yield and the actual money earned by the LIC on the amount it collects from pensioners will be reimbursed to it by the government.

While making these cuts, the finance minister has not withdrawn tax exemptions on small savings as recommended by the Reddy committee and the Kelkar taskforce.

The interest rate on small savings will come down to 8 per cent from the present level of 9 per cent. In case of Relief Bonds, at present, the interest rate is pegged at 8 per cent while in case of Savings Bonds the interest rate is 7 per cent. Relief Bonds come with an investment ceiling of Rs 200,000.

Despite the cut in interest rates, the Centre has budgeted for an accretion of Rs 41,950 crore (Rs 419.5 billion) during 2003-04 to the savings deposits schemes like post office schemes, Rs 6,750 crore (Rs 67.5 billion) in savings certificates schemes like National Saving Certificates and Kisan Vikas Patras and Rs 12,500 crore (Rs 125 billion) in case of PPF.

The revised estimates for 2002-03 have projected an accretion of Rs 34,770 crore (Rs 347.7 billion) in case of savings deposit schemes, nearly 49 per cent over the budget estimate of Rs 23,350 crore (Rs 233.5 billion) for the current fiscal.

Similarly, as per the revised estimates for the year, accretion to PPF is estimated at Rs 10,050 crore (Rs 100.5 billion), 10.2 per cent higher than the budget estimate of Rs 9,120 crore (Rs 91.2 billion) for 2002-03.

In case of certificate schemes, revised estimates pegged accretion during the financial year at Rs 9,580 crore, 27.22 per cent higher than the Budget estimate  of Rs 7,530 crore (Rs 75.3 billion).

The government had in Budget 2002 decided to transfer the entire proceeds from small savings to the states. From September 2002, the Centre, however, retained 20 per cent of the mop-up to help them retire their high cost debt.

The government had dropped the interest rate on small savings instruments by an average 50 basis points in Budget 2002.

The interest rate on these instruments was reduced from 9.5 per cent to 9 per cent by former Finance Minister Yashwant Sinha.

The labour ministry, however, retained the interest rate on employee provident fund at 9.5 per cent.