A reduction in interest rates appears to be the primary thrust of the government's macroeconomic policy. Defying the recommendations of the Central Board of Trustees of the Employees' Provident Fund (EPF) Organisation, the custodian of the moneys set aside by or on behalf of employees, the government has decided to reduce the rate of interest on these funds by one percentage point from 12 to 11 per cent. This move, while in keeping with the reductions in the interest rate on funds deposited under the Public and General Provident Schemes (PPF & GPF), amounts to violating the decision-making norms relating to the use of EPF capital.
 
The law relating to the EPF Scheme, 1952 states quite clearly that the central government would decide on the EPF interest rate based "on the recommendations of the CBT", which is a 43-member body chaired by the Labour Minister. With the hope of convincing the Board to revise down the interest rate in its meeting which was held on April 25, the government reduced the interest it was paying on EPF funds deposited with the Special Deposit Scheme run by it to mop up this capital from 12 to 11 per cent. Yet the Board of trustees decided to unanimously recommend that the interest paid on EPF deposits should be maintained at 12 per cent during fiscal 2000-2001. Given the government's decision with regard to the Special Deposit Scheme, this would have required the Fund to use the reserves at its disposal to maintain the interest rate at 12 per cent. The government has obviously decided to counter the CBT decision by unilaterally declaring, for the first time in the scheme's history, a lower interest rate.
 
This desperation to push down all rates which provide some kind of a benchmark for interest paid to depositors has two implications. First, it suggests that the argument espoused by advocates of reform within and outside government that financial liberalisation has moved the system in the direction of a regime of market-determined interest rates is patently false. As in the past, the structure of interest rates is still engineered by the government. Second, the government has made a low interest rate regime a major plank of its macroeconomic policy. In this, the government has been joined by an ostensibly more 'auntonomous' central bank. Quite recently, Reserve Bank of India Deputy Governor Y.V. Reddy reportedly declared before Reuters Television cameras that: "Our preference and the preference of most of the market participants is to have an easier interest rate regime at this stage of development."
 
There are many reasons why lower interest rates are being sought after by those directing India's economic policy. To start with, having internalised the IMF's argument that the high level of the fiscal deficit is India's economic problem No. 1, and unable to mobilise additional taxes or reduce expenditure to reduce that deficit, the government is keen on reducing the interest burden in its budget by squeezing middle class savers. A reduction in interest rates on small savings and provident fund schemes not only directly reduces the government's interest burden since it is a major borrower of such funds, but it dampens open market rates on government debt as well. Expectations of a cut in the EPF rate, for example, raised the prices of government bonds, resulting in a fall in the implicit interest rate on such bonds.
 
Second, the government has obviously decided that an easy money policy and lower interest rates are the best options available with it to counter the sluggishness in the industrial sector experienced during the three fiscal years ending 1998-99. A low-interest, easy-money regime has contributed to a recovery in two ways. In the first instance, it stimulates a credit-fuelled recovery in manufacturing demand. Access to credit to acquire a range of durables from automobiles to personal computers, electronic items and white goods has eased substantially and so have the interest rates on such credit. This has helped sustain consumer demand in certain sectors. Further, the low-interest, easy-money regime has set off a credit-fuelled recovery in housing investments that has been strengthened by the unusually high deduction from taxable income being permitted on account of interest paid on housing loans.
 
Finally, lower interest rates on bank deposits and small savings schemes are undoubtedly expected to counter the sluggishness in India's stock markets. By encouraging small investors to seek out savings avenues that offer better returns, a low interest rate regime forces them to invest in mutual funds and shares. This increases liquidity in the stock markets and is possibly being seen as a counter to the downward trend being witnessed in those markets in recent times. The possibility that in the process small investors could burn their fingers and register losses is, of course, being ignored.