GOVT’S U-TURN ON SMALL SAVINGS SCHEMES: POLITICS OVER ECONOMY!

 

The government’s move to reverse its decision regarding cut in the small savings schemes by 50 to 110 basis points for the first quarter of the financial year starting April 1, 2021 in less than 24 hours stems from its fears of the political fall-outs.  At a time, when the elections to four states and a Union Territory are underway, the proposed move would have given ammunition to the opposition parties to up the ante against the ruling National Democratic Alliance (NDA) government for following “anti-people” policies which would have hurt its political fortunes. That explains the government’s swift move to reverse its proposed decision to avoid any political backlash.

The proposed move to reduce interest rates on small savings schemes would have certainly hurt the small investors who have parked their money in the schemes which entail higher interest rates than the regular fixed deposit. Moreover, the investors also benefit from tax exemption offered by these schemes which is not the case with fixed deposit. With inflation inching further, these small savings schemes are the only ray of hope for small investors.

When a large number of people are yet to recover from the shock of pandemic-caused lockdowns which hurt them badly, the proposed move would have certainly been a double whammy for them and the resultant anger could halt the resurgent march of the Bharatiya Janata Party (BJP) in the elections.

Should the small investors then cheer the government’s U-turn?

Certainly not! The government’s decision to revisit its earlier announcement is just a temporary move which will be restored when the election process is over. The government has just put it on hold. For, the cut in the small savings schemes is the need of the hour which is in the interest of both the people and the nation.

Banks, particularly the public sector ones, have not passed the benefit of the repo rate cuts by the Reserve Bank of India, meant to stimulate various aspects of economic growth, to customers. They fear that it will hit their margin if they do so in view of the rate on deposits. Their fears are not completely unfounded as they are struggling with bad loans whereas non-banking institutions are facing solvency issues. Therefore, instead of adjusting their lending rate, the banks have done just the opposite by raising their deposit rates to collect funds to keep their balance sheets healthy.

The banks can soften their lending rate, which is vital to kick start the economy as it will increase the private consumption and offer liquidity access to all sectors hit by the pandemic, only if they reduce the deposit rates. Though there has been uptick in demand which collapsed following the pandemic, it needs to be sustained. Still, people are conscious about spending as income for all dropped to the bare minimum during the pandemic which led to a complete halt of the economic activities. 

The RBI has done its part by bringing the repo rate down to just four percent which is the lowest repo rate in the last two decades. Today, the banks are in a very advantageous position as they borrow money from the RBI at a much lower interest rate. When the RBI lowers the repo rate, the commercial banks are expected to pass this benefit to their customers by reducing the interest rates on the loans they offer. But it is not happening as the banks and financial institutions are still hesitant to pass on the entire rate cuts to the borrowers. 

It will be important to understand that the rate cuts make loans cheaper allowing people to pay a lesser amount of interest on loans – whether it is personal loans, car loans or home loans. The resultant saving for any person is much more than what he earns on his money parked in the banks.

That’s not all. If the banks pass on the rate cuts to the industry, it not only gives a boost to the industry, the consumers also stand to benefit in the end as the prices of commodities also become cheaper  due to lower interest rates.

The advantages of rate cuts thus outweigh the benefits of higher deposit rates as it boosts the demand side of the economy and spur consumption, the twin necessities for the revival of any economy. 

One can understand the U-turn by the Finance Ministry as the ruling BJP can ill-afford to anger the common man right now. It is also equally important for the common man to understand that the high deposit rate regime will do no good either to him or to the nation. Let the poll mania be over, the cut in the small savings schemes will be back on the table.