|Big fix for small savings|
|Thursday, 09 June 2011 00:00|
Small savings have always posed a big problem, for the government which had to bear the burden of higher-than-market interest rates on such savings, and for lenders and borrowers who found this distorted interest rate structures. As finance minister, Yashwant Sinha lowered rates and even appointed two committees to see how the rates could be freed up. Around a decade later, the Shyamala Gopinath committee has reiterated what both the YV Reddy and Rakesh Mohan committees had said: link the rates for small savings to those of government securities. If the government accepts the recommendations, it will be a big cleaning up of the distortions in the interest rate structure. Gopinath has kept enough sweeteners to make it attractive—a higher ceiling for Public Provident Fund, a higher interest rate of 0.5% on post office deposits; the current level of GSec rates also means deposit rates on small savings will go up immediately. The link with GSec rates means the government will no longer have to bear the burden of paying small savers a higher-than-market rate of interest, and also means the long gaps in fixing rates will be replaced by an automatic structure.
That said, the critical question is why we even need such schemes given the plethora of alternative schemes available for investors. The traditional argument is that such schemes are run by post offices, and that there are more post offices in India than there are banks. That’s true, but why not look at post offices acting as agents for banks? The fact that all such schemes are open-ended, in the sense the government has to take the money whether it needs it or not, is problematic though the GSec link mitigates the problem for all practical purposes.
It is also not clear why there has to be a 25 bps difference between GSec and small savings rates—this goes up to 100 bps in the case of senior citizens—unless the idea is that some amount of tokenism has political value. If the idea is to cushion investors, and the older ones need more protection, why not then put in some inflation indexation? The decision to give the states a breather on borrowing from the National Small Savings Fund is, in principle, a good one. Under the current law, before borrowing from the market, states have to use the funds available in the National Small Savings Fund—for all states, this is cumulatively put at 80% of the inflows. This limit has now been reduced to 50%. This means the states can now borrow at lower rates; for states with poor finances, however the 80% proviso may have been helpful. The idea of abolishing/reducing commissions is a welcome one from the point of view of investors, but keep in mind the next-to-negligible response to the public provident fund where banks have no incentive to market the scheme. The same thing happened in mutual funds when commissions were abolished.