The Catastrophe of Collapsing Savings Interest Rates.jpg

The Catastrophe Of Collapsing Savings Interest Rates

Newspaper: Avenue Mail

24th April, 2021

Amidst the powerful second wave of the Covid-19 pandemic, on 31st March 2021, a silent government notification from the Department of Economic Affairs, Ministry of Finance, Government of India was issued which simply read the following “In exercise of the powers conferred by Rule 9(1) of the Government Savings Promotion General Rules 2018, the rates of interest on various Small Savings Schemes for the first quarter of the financial year 2021-22 starting from 1st April 2021 and ending on 30th June 2021 has been revised as indicated below”.

The late evening order from the Budget division of the Finance Ministry then listed down the savings rates of various fixed deposits, government savings schemes which had been slashed drastically beginning from the new financial year. The senior citizen savings scheme was reduced from 7.4% to 6.5%, National Saving Certificates cut down from 6.8% to 5.9%, the one year to five-year time deposits slashed anywhere from 0.4% to 1.1% with the largest impact in 2-year time deposits which reduced from 5.5% to 4.4%. The Public Provident Fund Scheme was hacked from 7.1% to 6.4% and the general savings deposit was reduced from 4% to 3.5% compounded annually. Even the government’s pet scheme the Sukanya Samriddhi Account Scheme was not spared, the savings rate of which was cut down from 7.6% to 6.9%.

Panic and pandemonium spread across when social media circles and Whatsapp groups widely circulated the new interest rates with disappointment and surprise and the new rates made it to the news channels as the prime-time news headlines. Five states of West Bengal, Tamil Nadu, Kerala, Assam, and the Union Territory of Puducherry were in election mode with furious campaigning underway. The opposition and civil society rose in an attack against the Government on reducing savings rates overnight.

Hardly had the news settled in, when on the morning of 1st April 2021, Finance Minister Nirmala Sitharaman hurriedly stated via Twitter at 7.54 am tweeting “Interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn.” This message from the Finance Minister soothed cracking nerves and the issue vanished from the media by mid-morning. A normal Finance Ministry directive on the change of interest rates at the starting of the new financial year became a meme fest on social media and Nirmala Sitharaman’s use of the word “oversight” exploded into a festival of sarcasm. 

 

Ex-Finance Minister P. Chidambaram took to Twitter an hour after the Finance Minister’s withdrawal message tweeting “Announcement of interest rates on savings instruments for the next quarter is a regular exercise. There is nothing “inadvertent” about its release on 31st March. The BJP government had decided to launch another assault on the middle class by slashing the interest rates and profiting itself……when inflation is at about 6 percent and expected to rise, the BJP government is offering interest rates below 6 percent hitting the savers and the middle class below the belt”.

But the directive to reduce savings rates was neither a mistake nor an oversight. Interest rates have been consistently been reduced by the government since 2016. Take the 5-year Senior Citizen Savings Scheme, for instance, the Manmohan Singh government launched the savings scheme for senior citizens to earn higher interest than the regular savings rate in August 2004. The inaugural interest rate was 9% for the fiscal year 2004-05. From 2011, the interest rate on the scheme swelled to 9.3 % till 2015, post which the savings rate fell to 8.6% from April 2016 onwards. Today the interest on the senior citizen savings scheme stands at 7.4% up to the quarter ending June 2021. The saving rate has fallen from 9% to 7.4% to now 6.5% (as per the circular of March 31st, 2021) in less than five years.

The senior citizen savings scheme was a legacy gift from the Manmohan Singh Government, but the present Narendra Modi government’s pet program, the Sukanya Samriddhi Account Scheme launched on 22nd January 2015 under the aegis of “Beti Bacho Beti Padhao” campaign meets with a similar fate of collapsing interest rates. Started with a fanfare of 9.1 % saving rate in the fiscal year 2014-15, today the scheme for the girl child only fetches 7.6% and if the notification of 31st March 2021 is to be believed, the savings rate on this scheme will fall to 6.9%. The fall from 9.1 to 6.9% will be a steep decline in the government’s own schemes.

Drastic reduction in the savings rates in the 1-5 years’ time deposits since 2016 had also affected the savings in the pockets of the people. As per the data released by the National Savings Institute under the Department of Economic Affairs, Ministry of Finance, Government of India, the time deposits of five years which stood at 8.3% in 2011 have now reduced to 6.7% as of March 2021 and as per the withdrawn proposal of 31st March 2021, the savings rate was to be reduced further to 5.8%. A fact to be noted here is that the Manmohan Singh Government increased interest rates of 5-year time deposits from 7.5% to 8.3% in 2011. Fresh out of the financial crisis of 2007-08 perpetrated due to the bankruptcy of Lehman Brothers, the global financial meltdown, and the US economic fallout, the Manmohan Singh Government increased the savings interest rates from the fiscal year April 2011 for all National Saving Schemes from the modest savings rates to the increase in the public provident fund rates.

Since the early times, Indians have had a savings culture. The culture of savings further improved when the financial systems were organized post-Indian independence in 1947 with the establishment of the Reserve Bank of India, nationalization of banks, and the development of personal banking. It is often believed that India survived near bankruptcy in 1991 and the various financial crisis of international markets over the decades due to the strength of the resilient Indian economy and the savings habit of the people. India survives every financial crisis because the economy is partially built on these hard-earned savings of its people. The Indian mentality has always been of thinking for tomorrow, by being more responsible about their own future. The theme of the DNA of Indians has been of “Save for the rainy day” and they found the national saving schemes of the Government of India the safest option to park their money, no matter how little they had.

Narasimha Rao and Manmohan Singh scripted history when they unleashed the epochal budget of 1991 which changed the course of Indian history. The landmark budget transformed India into a consumption story and made it one of the largest markets in the world. This budget over the years upgraded a chunk of the aspiring population and clearly defined into what is called the middle class. The aspirational middle-class flush with the booming economy turned to the national saving schemes to deposit their money, ably supported by the higher interest rates offered by the government and its banks. The higher the disposable income, the higher the savings.

The Reserve Bank of India data shows the historical significance of household savings from the 1950s to the 2000s. The higher the growth in the economy, the higher the disposable income, the higher impact on savings. Like the older generation which believed in traditional methods of savings, the younger population though swayed by the benefits of the share market and mutual funds, and the EMI economy has not curtailed generation Y and millennials to not invest in the national savings schemes.

 

Globally, there is hardly a saving culture in the developed world, where senior citizens are often seen working as security guards, at malls, at cash tills to survive the day, India and its older people are stronger due to the savings culture, where they have a regular income even when they are past their prime.

In the film English Vinglish (2012), Sridevi plays a home-based entrepreneur who earns through a modest business of selling laddus and snacks. When she must pay for an English-speaking course to secretly learn the language, she takes out her savings from her almirah locker to pay for the course. This film exactly depicts the mentality of the Indian household which is to save for the future when an unforeseen expenditure will need to be taken care of.

The carefully cultivated savings culture is under threat through the reduced rate of savings. While some economists do bat for lowering interest rates, the long-term impact of people not having savings in their hands will be devastating. The next financial crisis may not be kind to us, and it is this saving culture that will save India from any uncertainties in the decades ahead. The government must foresee the forward catastrophe of a lower savings rate and stall any further reduction.

Though the savings proposal has been withdrawn, for now, one cannot be sure of the directives of the Finance Ministry after the results of the state elections due on 2nd May 2021 and the consideration of the trend of reducing savings rates since 2016.