What the government needs to do is cut high tax free rates offered on public savings, which would bring down interest rates and spur much-needed economic activity. But, the government is not letting it happen, fearing voter alienation.

Almost everyone agrees on the need for lower interest rates the politicians, the government, the central bank, and, of course, the Indian industry.

Inflation is low, running around three per cent, while banks' Prime lending rates are 12 per cent plus. But, for all the brave talk of a second generation of economic reforms, Indian ministers, despite the luxury of their first majority government, have again retreated behind calls for building political consensus before taking any step which could upset a section of the electorate.

Failing to act fast to remove this critical obstacleto lower interest rates is tantamount to burning money India cannot afford and this timidity would be a symbolic blow to hopes that Prime Minister Atal Behari Vajpayee's Bharatiya Janata Party (BJP) government will deliver the reforms it has so loudly trumpeted.

The foot-dragging brings back into focus international rating agency Standard & Poor's concern that while India had developed a strong political consensus in favour of reforms, the consensus is only for weak reforms."The major danger to any kind of reforms, particularly on the interest rates, is that the BJP gets complacent...there are signs they are getting complacent," Surjit S Bhalla, Director of Oxus Fund Management said."The sense of urgency that is needed is lacking."

There are around 20 million government workers who have ploughed their savings into provident funds which offer tax-free rates of 12 per cent while bank deposits offering 10 to 11.5 per cent for over five-year tenors are taxed.

The rigidity in the system caused by thefixed rates offered by provident funds, some analysts reckon, has added 100 to 200 basis points to the interest rate regime.

There is around Rs 3,300 billion ($76 billion) in various provident funds and government small savings on which the government has to bear the burden of paying interest. The government, which along with state governments and loss making public sector units, is running a fiscal deficit close to eight percent of GDP and rising, and can ill-afford its interest burden. Interest payments are already eating up just short of half the central government's revenues.

Sceptics feel Finance Minister Yashwant Sinha is in no hurry to get the "political consensus" for cutting provident fund rates and postpone the decision until the annual budget in February.

Labour Minister Satyanarayan Jatiya said this week the rate cut was not on the agenda of the Central Board of Trustees of Employees Provident Funds meeting scheduled for next month.

"Those rates may not be reduced for a while. And theyelevate the entire interest rate structure in the economy," K V Kamath, MD and CEO of ICICI Ltd. Analysts said even if the rates on provident funds and other state-run savings schemes were cut by two percentage points, they will still give, after taking into account the tax relief, an effective return of 13 per cent, the highest in the economy for risk-free assets.

Last month, the Reserve Bank of India in its monetary policy review said it wanted lower interest rates when it cut banks' cash reserve ratio by one percentage point to nine per cent. It left the decision on interest rates to banks, which have so far not lowered lending or deposit rates. With competition very stiff on resources, a high cost of operations and the risk of higher inflation looming, bankers said the scene is hardly favourable for an immediate cut in rates.