New Delhi, Nov 26: The 27 per cent rise in small savings collections during April-September 2003 over the corresponding period last year reveals the continued buoyancy in these schemes. Despite a 1 per cent cut in interest rates on these deposits in the Union budget for 2002-03, the sustained interest of small investors confirms not only that the real returns on these schemes continue to be high, but also that the demand for these savings is inelastic at current rates of return. This resilience should reassure the government for several reasons. The reluctance to align these rates with the general interest rate structure of the economy stems from the fear of upsetting a stable source of revenue for financing government expenditure. There is also a political dimension to interest rate reduction; apart from the danger of being politically costly vis-a-vis the middle class base, the fact that funds raised through these schemes are totally diverted to the states after deduction of withdrawals inhibits drastic reduction too. The revenue shortfall left by a possible exodus of investors from these schemes would then have to be made up from alternative sources such as conventional taxation or equivalent expenditure cuts. Both these options in the present state of fiscal affairs and reforms appear unlikely in the short-term. However, there is a silver lining to this dismal scenario, which is the fact that the entire liability of these schemes rests with the Centre. To the extent that the comparatively higher interest rates on these schemes further increase its debt-servicing burden, the latter has the incentive to bring it down, albeit gradually, to balance economics and politics. This explains the downward trend in these rates over the last three years; interest rates on these savings have been cut annually, beginning 2000, and it would be logical to presume a further cut in the forthcoming budget too. There is also a need to consider other determinants of the demand for small savings that should be factored in while deciding interest rate reductions. Illustratively, the savings deposits growth has been driven by schemes with the post office; this suggests that the outreach factor along with low or nil access costs also serves to stabilise demand. This should surely embolden the government to implement the recommendations of the YV Reddy Committee, which suggested that the small savings rate be kept 50 basis points above the annual average rates of government securities. It would do a lot to remove the downward stickiness in interest rates, which would not only improve the effectiveness of monetary policy but also enable commercial banks to lower operating costs without the fear of migration of deposits.