Why are small savings so important for the economy?

Arshad Shaikh looks at the issue of small savings rates. After nearly two and a half years, the rates were finally revised but increased only marginally. However, the increase was viewed by many experts and the small savings community as a case of too little and too late. How are these rates calculated and why is the government acting so stingy? Why are small savings so important and how do they help our economy? There is a need to look at the issue of savings and investment through a new prism and make a paradigm shift at a broad level towards equity from debt. After all, the survival of both the economy and the small saver is at stake.

Recently, the government announced a very marginal hike in the interest rates of Small Saving Schemes like two- and three-year-time deposits, Senior Citizens Savings Scheme, the Kisan Vikas Patra and five other Small Savings Instruments (SSIs) for the October-December 2022, quarter. The government deemed it prudent to exclude investment schemes such as the Public Provident Fund (PPF) and the National Savings Certificate (NSC) from the hike. The PPF and NSC are popular with the middle class and the small saver.

Nowadays, the interest rates offered on these small savings instruments have been linked to market rates. They are calculated and pegged between 0 to 100 basis points (100 basis points equals 1%) over and above the yields offered by government securities (G-secs) of comparable maturities. (Note that – yields are the annual net profits that an investor earns on an investment such as a stock or a bond while the interest rate is the percentage charged by a lender for a loan). This mechanism of offering interest rates greater than what is offered by G-secs is designed to attract small savers and small investors to these schemes.

However, this time around, the Reserve Bank of India (RBI) declared that the interest rates offered on the various small savings schemes would be lower by 44 to 77 basis points than what would be arrived at through the calculation-based mechanism. Naturally, this did not go down well with the ‘small savings community’.

In the comments section of a major daily (web version), an incensed small saver exclaimed – “This petty increase is too little and inadequate. Government can afford to be a little more generous in helping seniors. Last three years nil benefit. Only corporates got lower tax rates. SS scheme is not attractive. The interest is taxable.”

Earlier the interest rates were set for a whole year. The resetting of rates on a quarterly basis commenced under the Modi government in 2016. This quarterly tweaking of rates was undertaken despite all expert committees (set up to examine the question of savings rates) strongly arguing against the resetting of rates on quarterly basis. The experts warned that doing so would punish the small savers if yields on G-secs remain suppressed for certain periods as we saw during the pandemic.

India is currently facing inflation rates of over 6% and more than 10% in the case of certain essential commodities. The minuscule increment in interest rates on small savings and that too after nearly 27 months was therefore a rude shock for the millions of small savers, most of who are senior citizens. The ire of the small saver appeared justified as they were expecting some restoration in the rates after a significant cut of 50 to 140 basis points across schemes in April 2020.

SMALL SAVINGS AND THE ECONOMY

Small savings are extremely important for the economy. Typically, small savings instruments can be divided into three categories:

  1. Postal deposits (comprising savings accounts, recurring deposits, time deposits of varying maturities and monthly income schemes);
  2. Savings certificates like National Small Savings Certificate (NSC) and Kisan Vikas Patra (KVP); and
  3. Social security schemes like Public Provident Fund (PPF) and Senior Citizens’ Savings Scheme (SCSS).

According to the National Savings Institute, which works under the Department of Economic Affairs, under the Ministry of Finance, the Gross Small Savings Collections in Post Offices and Banks for 2017-18 was `5.96 lakh crores. One can estimate the size of small savings when we find that the entire personal savings in India in 2016 amounted to `26.01 lakh crores.

Small savings schemes are popular as they provide returns that are higher than FDs (fixed deposits) offered by banks. All deposits under the various small savings schemes are collated into a National Small Savings Fund. This is the main source of funds for the government to finance its fiscal deficit. The balance amount is invested in G-secs.

It is important to keep the interest rates on small savings above market rates as many pensioners and those who have retired from the private sector utilise these interest earnings for their consumption expenditure. Thus, not only do small savers drive savings and investment, but they also propel demand in the economy.

THE GOVERNMENT’S JUSTIFICATION

The government says that small savings schemes carry administered rates along with various types of tax incentives. According to an RBI paper, this results in “higher interest costs, fiscal burden, and implications for private investment. The relative inflexibility in interest rate structure on small savings has repercussion on financial markets as it provides rigidity to other interest rates in the economy.”

In other words, the government resents this subsidy (in terms of interest rates) to the small saver, which adds to the government’s fiscal burden as well as a significant loss of funds that could have been channelled across the bond markets. The government also feels that with the rapid expansion of the banking sector and the maturing of the stock market, the dependence on small savings has reduced significantly.

However, this line of thinking can be countered by arguing that just as the government could afford to bail out the corporate sector to the tune of `1.6 lakh crores in September 2019 for fixing their balance sheets, the government must bear the burden of a few thousand crores to save millions of small savers.

THE MOVE TO EQUITY

While it is important to protect the interests of the common man and ensure that he gets a decent return on his small savings, there is a need to move beyond this paradigm of fixed income (based on a certain rate of interest) on deposits. Expecting a fixed return on your investment in the form of a deposit or a loan (banks call them assets) is morally problematic. It is an unequal transaction and always gives the creditor the upper hand.

Expecting the debtor to return a pre-determined amount for the money loaned not only suppresses economic enterprise but also results in rapid income inequality that ultimately slows growth and development. What we require is a move towards equity.

We must transform our mindset that accepts bearing both benefits and losses against investment and savings that are ultimately used for funding economic enterprise.

This is the only way out of the “rat race” between small savers and the gigantic funds of business conglomerates for returns through fixed-income instruments with the government leaning in favor of market forces. There is a quote attributed to Publilius Syrus: “Debt is the slavery of the free.” Let us resolve to free ourselves from this bondage.

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