A big blow to savers

S Kalyanasundaram The recent cut in interest rate of small savings schemes is a severe blow for savers, who continue to be short-changed by policymakers.

Though there are various small savings schemes — National Savings Certificate, Public Provident Fund, Kisan Vikas Patra, Senior Citizens Savings Scheme, Post office Fixed Deposits, and so on — let us take the case of Senior Citizens Savings Scheme for comparison.

Just ten years back this scheme was paying interest of nine per cent. With the present reduction, the savers will receive 7.4 per cent from April 1, 2020. The reduction is applicable not only for accounts to be opened but also for the existing ones.

For an investment of ₹15 lakh (maximum permitted under the scheme) the annual interest was ₹1,35,000 ten years back. Now this will come down to ₹1,11,000 per annum.

More than the actual amount received, what matters is the purchasing power of the amount received. The inflation rate in India between 2010 and today has been 95.32 per cent. This means that ₹100 in 2010 is equivalent to ₹195.32 today. We can also say that purchasing power of ₹100 in 2010 equals ₹195.32 today. The average annual inflation rate has been 6.28 per cent.

So, if ₹1,35,000, being the interest paid in 2010, is to have the same purchasing power, it should be equivalent to ₹1,35,000 x 195.32/100, which comes to ₹2,63,682. So the depositor has lost the purchasing power to the extent of ₹1,53,682 (₹2,63,682 - ₹1,11,000) in ten years.

We can cross-check this figure using another formula, which is applied to calculate long term capital gains by the income-tax department. Cost Inflation Index for 2009-10 was 148 and for 2019-20 it is 289. Hence ₹1,35,000 is to be treated as ₹2,63,614 (₹1,35,000 x 289/148) by applying the Cost Inflation Index. This is almost similar to the earlier calculation we have seen.

Why this reduction now?

The business community often pressure the government and the RBI for a reduction of interest on credit, so that their cost of production can come down. And the RBI also advocates lesser interest rate for credit for faster growth of the economy.

It will not be out of place to mention here that on examining the relationship between three-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies, it was found that interest rates follow GDP growth and are consistently positively correlated with growth. If policymakers really aimed at setting rates consistent with a recovery, they would need to raise them ( https://www.sciencedirect.com).

What can happen now?

According to RBI data, small savings schemes accounted for a little over a fifth (20.9 per cent) of all Central government borrowing in FY18, up from 17.2 per cent a year before and 2.4 per cent in FY14. This is the highest contribution from small savings in 19 years.

Hence the government will save substantial amount of interest outgo.

Due to lesser competition from small savings schemes, banks will increase their deposit base. Increase in bank deposit will result in higher Statutory Liquidity Reserve and Cash Reserve Ratio. Higher SLR requirement will make banks invest more in government securities and help the government’s borrowing programme. As no interest is paid on CRR, profit of the RBI will also increase, which will indirectly go to the government.

Net financial savings by Indian households dropped to 6.5 per cent of GDP in 2018-19 (FY19) — the lowest in at least eight years. The drop has been fuelled by both a fall in gross financial savings as well as a rise in liabilities, shows the data recently released by the National Statistics Office (NSO). But the policymakers do not seem to bother about this aspect.

The writer is a retired banker

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