Save the small savers

Subir Roy
Senior Economic Analyst

An old acquaintance from the management side of the newspaper house, in which I once was ‘business editor’, was on the line not so long ago. He was bemoaning that interest rates on small savings had been cut again. The return on the deposit in his PPF account, in which most of his life’s savings had been placed, would be hit. This interest income was his pension as his lifelong private sector employment did not fetch him a pension which government service would have. I could do little more than sympathise. These past few days, I have been expecting a call from him again, bemused by the interest rates being cut yet again, and then restored in less than a day.

There is good economic logic and political compulsion behind not tampering with interest rates.

The gentleman’s plight and the volte-face on the part of the government highlight the vulnerability and implicit power of the middle class. It does not have the numbers compared to those below it in the economic hierarchy, but makes up in terms of being able to set the public mood. Nothing turns the mood more sour than the sight of a pensioner’s income being threatened even as prices have started to go up again.

Small savings schemes — grouped under post office deposits, savings certificates and social security schemes, like PPF and senior citizens savings schemes — are an important source of household savings. The money collected under the entire gamut of small savings schemes is used by the Central and state governments to finance their fiscal deficits. The balance left over is invested in government securities.

The decision on the part of the government’s economic administrators to advise and implement the rate cuts in the first place cannot be faulted. The fiscal deficit, the primary benchmark of the stability of the government’s finances, must be brought under control after it had gone haywire in the preceding year of lockdown and economic slowdown. A good way to do this would be to reduce expenditure by bringing down interest outgo on government borrowings, and this is best done by lowering the rate of interest at which the government borrows.

In the hierarchy of interest rates — right from what is paid by the government on its long dated bonds to what banks pay their depositors — small savings interest rates (a form of government borrowing from you and me) cannot be the odd man out. If interest rates for the most part are going down, then those on small savings must follow suit.

If small savings rates remain out of line, then money will flow out of banks into small savings. This will prevent banks from giving higher accommodation to commercial borrowers so that they can bump up business levels and overall economic activity. This, in turn, will stymie the nascent recovery that is taking place in the economy which will prevent a rise in the government’s revenue earnings and put paid to efforts to bring down the fiscal deficit, which is where we began in the first place.

A government is asking for trouble if it tries to lower small savings rates even as a vigorous election campaign is entering its final phase. This is particularly so when inflation seems to be on the way up again. The February figures, the latest available, show an uptick for both consumer prices and food inflation. When they fell during the previous few months, the expectation was that the high inflation rates through 2020 were now behind us.

So the dilemma is that to keep bank interest rates low to aid credit expansion and economic recovery, it is necessary to bring down the entire interest rate regime of which small savings interest rates are a part. But lowering small savings interest rates during election time is to antagonise the middle class, of which pensioners are a part.

Is there a way out? Yes. What the government must learn to do is not to miss the wood for the trees. The fiscal deficit number is important, but more important is the need for overall economic recovery. Once that begins to take place, aided by growing bank credit facilitated by moderate bank lending rates, the growing volume of economic activity will increase the government’s tax revenue collection, and thereby, address the fiscal deficit number after a time lag.

Clearly bank lending rates should go down or remain low. But simultaneously, there is good economic logic and political compulsion behind not tampering with small savings interest rates. Not lowering them will increase confidence levels among the middle class and aid consumption expenditure. This is particularly so because pensioners who depend on survival on the interest income from their small savings, and do not save anymore to keep creating a post-retirement nest egg, spend all on keeping body and soul together, that is, channel the entire interest earnings into consumption expenditure.

What we are arguing for is small savings rates be left intact in a regime of declining interest rates. This will undoubtedly make them more attractive vis-à-vis bank deposits, but there will not be an automatic and similar outflow from one to the other, as small savings are typically long-term savings which are planned well in advance. On the other hand, bank deposits fall in two categories. Current and savings bank deposits represent the amount customers leave aside to meet day-to-day cash needs and there is a disincentive to pre-encash bank fixed deposits as that attracts an interest penalty.

Over and above all this, there is a welfare argument in favour of ensuring that the superannuated are able to look after themselves by ensuring that their post-retirement incomes are not impeded in any way. Just as basic healthcare and up to secondary level education need to be adopted as social security goals — that is, the state should foot the bill and to the needy citizen they should be free — a post-retirement cash flow, or a pension by whatever name, should also be provided by the state to the not so well-off.

The bottom line is — don’t tamper with the middle class’s superannuation-related savings, whatever a narrow reading of economic theory might suggest.

(Interest declared: I am a superannuated private sector employee!)