Monetary Reform Some Unresolved Issues

The second supplementary proposition I wish to make pertains to the RBI Committee's expectation that there is "considerable scope for government to tap the savings of the public through an appropriate interest rate structure and offer of a wider spectrum of savings instruments with attractive features" (para 9.38). For reasons already stated, it is neither feasible nor desirable to raise the interest/discount rates on government securities; the bulk of government's borrowing will have to be from the captive market of the commercial banks. But special savings schemes in the form of special bonds or certificates can be devised and made attractive for the general public as for instance are the Six Year National Savings Certificates at 12 per cent interest and fiscal concessions which are of course inequitous. These certificates have proved.popular. For instance, during 1984-85, the subscription to these certificates have amounted to about Rs 2400 crore. Other attractive schemes are possible. An important lacuna is a savings scheme with hedging against possible rise in prices. In the absence of such an instrument, large savings are going into gold and bullion and real estate pushing their prices far above the general level. Hence, there is need for a price-indexed bond. If the government intends to keep the rise in prices under 4 per cent per annum, it will be worthwhile issuing a price-indexed bond bearing 11 per cent rate of interest. If the price rise will be about 4 per cent, the bond will prove as attractive as the deposits with companies. If the rise in prices is well under 4 per cent, the bond may not prove attractive. But that should be considered a success of the monetary and fiscal policies and not a failure of the bond. On the other hand, if the price rise is not contained within 4 per cent, the price indexed bond will prove immensely popular and hence anti-inflationary. Moreover, with such a bond in the market, the government will have a vested interest in keeping the price rise within limits. The bond may be of one year maturity so that, judging by the performance of the prices and the performance of the bond, the rate of interest on it may be revised. The bond may provide an extremely sensitive and useful indicator of the public assessment of the price situation. What is being proposed is an additional instrument with a feature which is presently wanting.