MUMBAI: It was a circular the government could have slept over. Nevertheless, finance minister Nirmala Sitharaman on Thursday rolled back the steep interest rate cut announced for small savings schemes, but not without some overnight backlash on social media.
The proposed cuts–detailed in a circular on Wednesday–were in the range of 50-110 basis points for various schemes, from post office deposits to the Sukanya Samriddhi scheme specifically for the girl child. The finance minister today tweeted, saying the circular was issued by “oversight” and the interest rates stand unchanged.
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Small savings scheme interest rates are not aligned to other rates in the economy. Most interest rates, including those of government bonds, have fallen steeply over the past one year. But since small savings schemes are administered rates, these have been kept unchanged.
But how long can the government avoid pruning these interest rates? And how does it plan to plug the loopholes where the rich take advantage of subsidies meant for the poor?
Small savings now account for a much higher proportion of funding for the government, which increases its cost of borrowing. According to budget estimates for financial year 2021-22 (FY22), receipts from small savings securities account for as high as 40% of the budget for market borrowings, compared to 30% in FY19.
“The government is likely to remain reliant on the small savings sector to fund the fiscal deficit, with that source accounting for more than 20% of the deficit in recent years versus 10% in FY15-16. While this could reduce the market supply of government paper, using small savings funds is a sub-optimal option from a cost of funds perspective,” Rahul Bajoria, economist at Barclays Securities India Pvt. Ltd had said in a note, soon after the FY22 budget was presented by the finance minister.
To be sure, the argument that the move would have hurt savers is valid. India is predominantly a saver’s country, and without social security, the need of senior citizens and vulnerable sections of society can’t be ignored. And the recent rise in inflation is not helping investors get good real returns either. For instance, if the cut on interest rates on the public provident fund (PPF) scheme were to be enforced as originally intended, it would not have returned more than 2% in real returns for FY21. Bank deposit rates are already giving negative real returns to depositors.
But having said that, note that household liabilities have increased and not all who save are net savers. If lending rates are to fall to induce consumption or investment, a commensurate fall in deposit rates is inevitable. Also, the government needs to be wary of giving undue advantage to well-to-do savers, who try and take advantage of tax breaks and the differential in interest rates in small savings schemes.
Arvind Subramanian, former chief economic advisor, famous for his data-rich economic surveys, had argued in 2016 that the rich benefit from the EEE or exempt-exempt-exempt tax treatment being enjoyed under small savings schemes. “62% of individuals using the subsidies under section 80C are at the 97.3rd percentiles of the income distribution -hardly ‘small’,” the survey said
The real ‘oversight’ by the government is allowing the small savings schemes to grow far bigger than its remit of serving the vulnerable.
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