Govt will cut rates on small savings cautiously: FM Jaitley

New Delhi: Government will cut interest rate on small savings "cautiously" so as to protect vulnerable sections like retired employees, Finance Minister Arun Jaitley said Friday while expressing confidence that 7th Pay Commission report will not upset the fiscal deficit targets.

He said the government is using more than three-fold increase in cess on petrol and diesel to fund infrastructure projects like highways, but it will be a challenge to fund higher social sector spending due to increased outgo on salary and pension.

Speaking at the Hindustan Times Leadership Summit, he cited the example of the girl child scheme launched last year to saying that "if after one year you immediately slash it (interest rate) down radically, (it) may not be very politically prudent and therefore you have to move in that direction but you have to move a little cautiously".

As a lot of people depend on small savings schemes, the Finance Minister said, "we as an elected government have to look at it in addition to the economic principles with a sense of political pragmatism".

Bankers have passed on as little as 20 percent of the biggest rate cut effected by RBI since 2009 as they fear becoming uncompetitive to small savings like PPF and Post Office deposits.

Most small saving instruments pay an interest rate of 8.75 percent, compared to 7.5 percent on deposits at SBI. Bank deposit rate has to be lowered if the lending rate is brought down to allow transmission of 1.25 percent interest rate cut by RBI.

Jaitley said the impact of the 7th Pay Commission recommendations for higher salary and pension for central government employees, which will result in an additional annual burden of Rs 1.02 lakh crore on exchequer, would last for two to three years.

The recommendations are to be implemented from January 1.

"I am not particularly worried about the fiscal deficit target," he said.

The government, he said, was confident of keeping spending within the the targeted fiscal deficit of 3.9 percent for the current fiscal year ending March 31, 2016. Besides meeting the target, the quality of fiscal deficit too will be improved, he added.

Jaitley expressed optimism that the economy would grow by 7.5 percent in the current fiscal and the rate would accelerate further in the coming years resulting in more revenue for the government.

"If you achieve a fiscal deficit by either cutting down expenditure or withholding tax returns, then you may strictly have statistical figure, but the quality of the fiscal deficit will always be a suspect...We have concentrated on the quality of the deficit and we will probably be able to maintain it," Jaitley said.

On whether it was possible to cap the Goods and Service Tax (GST) rate by mentioning it in the Constitution, Jaitley argued that it would not be prudent as sin products and polluting goods were needed to be taxed at higher rates.

"One of the arguments also is that there are several kinds of products which will always have to be taxed higher, sin products will have to taxed higher and polluting products will have to be taxed higher. Therefore you can't have any mercy shown to them by accepting Congress party's suggestion that 18 percent cap on all these products in the Constitution itself," he added.

The GST Bill, which is being touted as the biggest reform in indirect taxes since Independence, is stuck in the Rajya Sabha because of political logjam.

As regards the debate on supremacy of Lok Sabha over Rajya Sabha, Jaitley said the directly elected House has a significant role in decision making in democracy as it is elected on a manifesto unlike the Upper House.

On the impact of the Pay Commission award to central government employees, he said the normal rule is that the expenditure on salary and pension should be 2.5 percent of the Gross Domestic Product.

The ratio will deteriorate in the initial years with the implement of the recommendations of the Pay Commission, he said.

However, the minister added, "as the base of the GDP increases, by the third or the fourth year, the spikes come down and (thereafter) you reasonably reach that 2.5 percent figure back... These pressures will be for the next 2-3 years".