First, the 10th Credit Policy presented by the Reserve Bank of India on October 10. As expected, it drove the bank rate down further—to 6.25 per cent, the lowest in the last three decades. The RBI is in a rut and fallen into one of the oldest (and, many times, most dangerous trap): reduce the cost of money so that capital spending expands with the resultant benefits trickling down to the people. We have reiterated ad nauseum in these columns that this strategy just does not work as regards the industrial sector in today’s political and economic conditions in the country (see box).

However, what we are concerned with here is the impact on personal savings. There was a time when a salaried person who saved five lakh rupees was assured of a monthly income of Rs. 5,000 from that oldest and most secure instrument: a fixed deposit in a bank. No more. Today, he’s lucky if he gets a return of even half that amount on the same sum. When bank interest goes down, deposit rates are the first to be slashed. This is imperative for survival of the banks and not a malicious act against the public. The UTI continued paying a dividend higher than its income allowed and everybody knows what happened to it. It went bust. Fortunately, the Government’s reputation was at stake and UTI was bailed out with massive inputs of public funds (euphemism for the people’s tax money). If it had been a private company, it would have been declared legally bankrupt. If a fall in bank deposit rates is the immediate impact of a cut in the bank rate, does that mean that industry, agriculture, you and me, will be able to borrow at lower interest rates? No way! You see, there is something called the Prime Lending Rate (PLR), the minimum rate at which banks agree to benchmark their lending strategies. This never goes down in proportion to the fall in deposit rates. In fact, even if it is slightly reduced, banks are allowed to charge rates over the PLR in line with their perception of the borrowers’ creditworthiness. There is no upper limit to this band. The Tatas, Birlas and Ambanis are wooed to take loans even below the PLR but small businesses are charged the highest rates, and as for personal loans, just sit down and calculate the interest on your car loan on the total term of the loan and you’ll know what I’m talking about.

It might be argued that while savings may become unremunerative and cars are only for the well-to-do who can afford to pay high interest rates, the interest rate on housing loans has been cut drastically and, today, a person with a monthly income of even Rs. 10,000 can dream of owning a small house. You think so? Listen to this. What the Credit Policy could not do, the Kelkar Committee Report on Taxation seeks to do. It recommends that the interest exemption on housing loans, which was given to boost the housing sector, be completely removed! The only good news for potential house-owners is that the Government is unlikely to accept this particular suggestion as it would probably drive the last nail into its hopes for reviving its sagging political fortunes. Remember, when the BJP lost in Delhi, where did the party put the blame? On Yashwant Sinha’s "anti-people budget."

The Kelkar Report goes after the individual taxpayer with a vengeance. It wants the bank rate to be further reduced to encourage capital spending, despite the lack of results over the frequent reductions in the past and ignoring the further attrition in savings rates that this would attract. It also wants to scrap all tax breaks and exemptions.