The interest rate cut in the Budget is unlikely to bring down cost of funds and boost investments, but it is surely intended to reduce interest burden of the government estimated to be over Rs 1,23,223 crore (Rs 1,232.23 billion) in the next fiscal, economists said in New Delhi on Monday.

Contrary to the economic theory that reduction in interest rate leads to higher investments, they said so far it has not resulted in capacity expansions.

"The rate cut in the Budget is not the primary reason for improving investments. It is mainly to reduce the interest burden," ICRA chief economist Saumitra Chaudhuri told PTI.

He said the Budget proposal for hiking the fertilizer prices, which was later rolled back, was also to reduce the non-plan expenditures.

Crisil's chief economist Subir Gokarn said the lowering of interest rates by the government had stimulated growth in some sectors like housing, but it has not helped the industry in capacity expansion.

"What is required is that the government should address the issues relating to infrastructure, labour reforms, exit issues, bankruptcy and securitisation laws," he said.

Interest payments of the Centre is slated to rise by 15 per cent from Rs 1,07,460 crore (Rs 1,074.6 billion) in 2001-02 to Rs 1,23,223 crore budgeted for 2003-04.

The interest burden is estimated to be Rs 1,15,663 crore (Rs 1,156.63 billion) in this fiscal as against the revenue collection of Rs 2,36,936 crore (Rs 2,369.36 billion) and a fiscal deficit of Rs 1,45,466 crore (Rs 1,454.66 billion).

"In absence of fiscal consolidation, public indebtedness will continue to climb. Interest payments currently absorb 50 per cent of revenue receipts," London-based Fitch Rating said.

Although the government has reduced rates on small savings, PPF, savings bond and realigned rates on other instruments, and Reserve Bank cut the savings bank deposit and repo rates, bankers are unwilling to reduce lending rates now.

A senior official of the Punjab National Bank said the bank's lending rates were one of the lowest and there was no scope for further reduction.

Last week, RBI Governor Bimal Jalan declined to comment on whether there was a possibility of a Bank Rate cut in the April Credit policy. "As of now, interest rates are soft," was the reply.

Bankers here said agriculture credit would be cheaper by 2.0 per cent as announced by the Finance Minister in the Budget. However, they were non-committal on the prime lending rates.