It is this set of perceptions of the role of a low-interest, easy-money regime, in which finance is not only expected to play a major role but would be a major beneficiary that underlies the concerted and even desperate drive by the government and the central bank to reduce interest rates sharply. While reserving judgement about the correctness of this thrust, it must be said to the credit of the government and the central bank that they have been quite successful in putting in place such a regime. In fact, after the debilitatingly high levels that interest rates touched during the stabilisation of the early and mid-1990s, they have been almost consistently moving downwards. The prime lending rate, or the rate at which banks claim they lend to their best clients (which came into operation in October 1994), stood at an average of 15 per cent in 1994-95 and 16.5 per cent in 1995-96. Needless to say most ordinary borrowers would have been charged rates that were between 2 and 3 percentage points higher than this. Since then the PLR has indeed declined, to 14.5-15 per cent in 1996-97, 14 per cent in 1997-98, 12-13 per cent in 1998-99 and between 12-12.5 per cent by September 1999.
 
Yet, given the levels at which interest rates rule internationally, the differentials in the inflation rate across countries and the central bank's expectations of the likely depreciation of the rupee over the coming months, the rate is still seen as being too high. The prime bank rate rules at around 1.4 per cent in Japan, 4.4 per cent in the Euro-11 countries, 7 per cent in Britain and 9.5 per cent in the US. Lessons from abroad learnt quickly in the context of globalisation are therefore encouraging the central bank to work towards lowering interest rates. One initiative in this direction was the reduction in the cash reserve ratio (CRR) of banks by one percentage point in the monetary policy review for 1999-2000, which, by releasing liquidity to the tune of Rs.7000 crore was expected to help ease interest rates.
 
That move was one more in a series of concerted efforts, involving reductions in the Bank Rate of the RBI, and in the CRR and SLR of banks, aimed at bringing down interest rates, especially real interest rates. However, after the initial success on this front reported earlier, the RBI was finding that that those rates had turned sticky. The reasons were manifold. First, the competition to woo household savings on the part of banks, government savings schemes, mutual funds and corporations had made any further reduction in bank deposit rates difficult to realise. Till recently, while public savings schemes offered tax-free returns of 12 per cent, long-term bank deposit rates hovered around 10.5-11 per cent. Yet banks found that the spreads between deposit and lending rates were under squeeze, making it difficult to reduce lending rates any further.
 
Secondly, financial reform aimed at giving the central bank more autonomy and authority had involved doing away with the practice of financing budget deficits through the issue of low interest (4.6 per cent) ad hoc Treasury Bills to the RBI. As a result the government has been forced to turn to the open market to finance its borrowing requirement. In the competition for finance with the private sector that ensued, interest rates on virtually risk-free securities had turned sticky.
 
Finally, the fiscal deficit on the government's budget has remained high despite the rhetoric of fiscal reform and adjustment. This is not due as much to an increase in expenditures as to a decline in the tax-GDP ratio, in the wake of repeated reductions in indirect and direct tax rates during the 1990s. According to the Annual Report of the Reserve Bank of India: "The large shortfall in tax collections during 1998-99 needs to be viewed against a decline of over 1 percentage point in the ratio of the Centre's gross tax revenue to GDP between 1991-92 and 1997-98 (from 10.0 per cent to 8.9 per cent). Excluding trade taxes, revenue from domestic taxes as a percentage of GDP fell by 0.4 percentage point during this period. This trend has been reinforced in 1998-99, with the overall tax GDP ratio declining further to 8.5 per cent and domestic tax-GDP ratio to 6.0 per cent."
 
A high and persisting fiscal deficit has meant that the government's borrowing requirement has gone out of control. With the government making this huge demand for funds, and with banks, who are under pressure to reduce their non-performing assets (NPAs), willing to hold no-risk and high interest government securities far in excess of the statutory requirement, the interest rate on government borrowing has provided a high floor to lending rates.
 
This combination of factors has reduced the efficacy of the efforts on the part of an ostensibly more autonomous central bank to bring down interest rates. Not surprisingly the RBI began fixing the responsibility for the stickiness of interest rates on the government. Deputy Governor Reddy had declared that any further progress in the move to an easier interest rate regime "would depend on the stance of the government on the interest rates it offers on savings and also the level of government borrowing." The decisions on the PPF and GPF schemes earlier and the recent unprecedented move relating to the EPF scheme shows that the government has responded on the first count, though little progress has been made on the second.