Small Saving Schemes
Just as traditions and cultures are handed down to us through generations, we are taught very early on in life to invest in National Savings Certificate (NSC) and PPF. Their interest rates are higher and being owned by the Govt, it is considered most secure. It also gives tax benefits. And this is precisely why majority of our elderly put their savings into these NSC and PPF schemes and it becomes a major source of income for those retired without pension benefits.
Latest Govt. Planning
Hence it came as shocker to know that the Govt is now planning to reduce the interest rates on these small saving tools. Grappling with huge fiscal deficits, the Govt is looking at every single nook and corner to either raise money or curb outgo. And after all this hunting around, it has come up with a solution – it may look at reducing the rates on small savings schemes by 50-75 basis points from the current rate of 8%. To look into the viability of this, it is planning to do what it does always – set up a committee, and this will be chaired by the former governor of RBI to study the issue and suggest appropriate steps regarding the same.
Why are they looking at this option?
If banks reduce their fixed deposit rates beyond a certain limit, it would become unattractive and people would divert all their money into small savings schemes. They say that close to 55% of savings by Indians are in bank deposits, and a shift of 15-20% of these deposits to small savings schemes can be expected if the term deposit rates are cut further.
This they feel is the main reason why the banks are not reducing their interest rates. So to get the banks to reduce their rates, the Govt wants to reduce the small savings rates. Well, if that is the logic, then where was the Govt when bank rates were much higher than the small savings rates? At that time, did they think of increasing the small savings schemes rates?
Impact Of action
This Govt has built up an image for itself of being a very fair Govt, giving benefits to those in the lower rung, being more social without being Leftist. So, in that context, this reduction of interest rates on PPF and NSC would go completely against the very grain of the Govt. This reduction, if it comes in, would hit the elderly and the vast majority of the middle and lower middle class very badly.
We may have an inflation rate of below one percent but does it really mean that the elderly and the middle class have more disposable income in their pockets today? Prices of commodities, fuel, health care, education, everything is higher than earlier. When the elderly spend 60% of their income on medical needs, this reduction from 8% will risk them making almost destitute.