Small savings rate cut muddle

By V.K Varadarajan

Small savings rate cut muddle  


It was the fastest rollback so far and the announcement of the reversal of 
the sharpest cut in the interest rates of Small Savings Schemes (SSS), including the
Public Provident Fund for the first quarter of April to June 2021. The quick decision
to reverse the rates cut order amidst the ongoing Assembly elections in West
Bengal, Assam, Tamil Nadu, Kerala, and Puducherry must have influenced the
the decision to withdraw the order.



Sensing the possible adverse impact on polling in these states, more importantly in
West Bengal and Tamil Nadu where BJP has high stakes, Finance Minister Nirmala
Sitharaman tweeted to assuage the feeling of people affected by the government
the order that the “interest rates prevailed as of March 31, 2021. Orders issued by ‘oversight’ shall be withdrawn”.



Besides, other reasons which must have weighed in for the reversal of the order was because Bengal was the largest contributor to the SSS and had a higher percentage of women voters than men. It was also a significant contributor to the Sukanya Shree Samruddhi Yojana for the girl child.



Interest rates on SSS (enjoying a sovereign guarantee are a safe bet for
small savers) have been reset on a quarterly basis since 2016.
However, this round of rate cuts assume significance as retail inflation has been
breaching the 6 (six) percent mark and the government was keen to lower interest
rates to make it easier to execute its borrowing plans for the year and spur the


The government plans to borrow ₹12.05 lakh crore in 2021-22, on the back
of a record gross borrowing of ₹13.71 lakh crore in 2020-21. High small
savings rates have been cited by the central bank as a major impediment in
ensuring policy rate cuts get transmitted into the banking system.


The Opposition did not miss the opportunity to attribute the rollback to the ongoing elections in four states. The rollback was also received with resentment from the small savers and pensioners amidst consternation as to which one of the two—the slashing rates or the rollback –was to be believed! The middle class and senior citizens, besides those working informal sectors, also wondered at the timing of the (now withheld) rates cut to order as they were already reeling under the rising core inflation and steep hike in fuel prices and the domestic LPG.


April 1 was a crucial day as it was on this day when the high-profile polling was due in the
prestigious constituency of Nandigram, where Trinamool Congress supremo and Chief
Minister Mamata Banerjee and her erstwhile aide and now a BJP candidate, Suvendu
Adhikari was engaged in the fiercest contest. Suvendu Adhikari had switched his loyalty to
BJP shortly before the elections. Nandigram is his stronghold.


The Government had announced sharp rate cuts on all small savings instruments
for the first quarter of 2021-22, bringing the rate of return on the Public Provident
Fund down from 7.1 percent to 6.4 percent and effecting cuts ranging from 40
basis points (0.4 percent) to 110 basis points (1.1 percent) through a notification
on March 31. The steep reduction in the rates related to Senior Citizen Savings Scheme(90 basis points of 0.9 percent) Quamashes Samruddhi Yojana (70 basis points or
0.7 percent.


Amidst all the avenues for savings, SSS still holds its preference by savers as
banks either offer a lower interest rate and the stock market with high volatility do
not fit into their portfolio. Besides, SSS enjoys a government guarantee and is
insulated from default risk. Thus, SSS is considered safe for investment by
the common man.


The cut in the rates was steep with the Public Provident Fund (by 70 basis points
from7.1 to 6.4 percent), Sukanya Samrudhdhi Yohana 50 basis points (from 7.6 to
6.9 percent and the Senior Citizen Savings Scheme (90 basis points )7.4 to 6.5 percent. Small Savings, besides being an important source for the savers for earning some additional income from the deposits and rely on the savings for their future, are also an important source for financing the government’s deficit.


However, it remains to be seen how the SSS will fare amidst the gloomy picture of
the economy and the second phase of Covid -19. Already, the Coronavirus
infection is assuming to a serious proportion with the daily count rising at an
alarming rate (fresh cases as of April 4 were 96,982 and 446 related deaths).
While it will have its impact on the economy, apprehensions of the second phase of lockdown loom large with many states, on the back of rising caseloads, have resorted to strict movement restrictions and partial clamping on personal contact-oriented businesses like restaurants and cinemas.


Tourism is another sector almost inactive since the first phase of Covid-19.
While the pandemic menace may have its impact on the savings also as further shrinking of business and jobs may cut into the earnings pushing people into a dilemma between spending and saving. Household financial savings stood at 10.4 percent of the nation's gross domestic product (GDP) in the July-September period of FY21, down from 21 percent of the GDP in Q1 of FY21. It is estimated to have further declined in the December quarter as consumption intensified as the virus infection showed a decline. Even as this gloomy picture presents a possible Deja Vu of 2020, the Government needs to address the declining trend in the household savings rate and protect the small savers from interest rate fluctuations.



NOTE: This is an opinion piece by Noted Journalist  V.K Varadarajan 


Disclaimer: The opinions expressed in this article are of a Noted journalist  V.K Varadarajan The facts and opinions appearing in the article do not reflect the views of does not assume any responsibility or liability for the same.



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