The Reserve Bank, as well as the economic commentariat, is relentlessly focussed on
lowering the interest rates that the government pays on various small savings schemes. Unless this is done, it is said to be difficult for banks to compete with the likes of post office deposits, PPF, the senior citizens scheme, the girl child savings scheme etc. The logic is that only if these products pay less attractive rates, will banks get enough of a margin to lower interest rates that they charge on loans. The Reserve Bank has been lowering rates for almost two years now but banks have passed on little of that to borrowers. Further, the argument is that now that inflation is lower, there is no need for depositors in the small savings schemes to be paid higher interest rates.
The idea is that unless the government lowers the rate of interest it pays to the public, banks will not be able to do much by way of lowering the interest rates they charge on their lending, regardless of the RBI's actions. Since the individual depositor can get about 8.5 per cent or above from the small savings schemes, banks will not be able to compete for fixed deposits. Unless they get cheaper deposits, they won't be able to give cheaper loans. So, for the economy to move forward, the government must stop competing with banks.
From a broad standpoint of growth and investments, the logic sounds impeccable. After all, it is being put forward by people who have a lot of practice in sounding logical. However, from the point of view of the crores of savers, this is a bit of a con job. For close to a decade, the real (inflation-adjusted) interest rates in this schemes were negligible or even negative. How many times did anyone argue that small savings interest rates should be raised? And low rates effectively meant that the small saver was subsidising the government, the banks and the banks' lenders?
Now, after last week's monetary policy (and a fresh round of exhortations to lower small savings rates), Finance Minister Arun Jaitley said publicly that the government intends to be 'cautious' in lowering these rates. He gave the specific example of the girl child scheme and said that, "if after one year you immediately slash it (interest rate) down radically, (it) may not be very politically prudent and therefore you have to move in that direction but you have to move a little cautiously." That seems to suggest that he intends to lower these rates, just not now. He seems to think reducing the rates is the right thing to do, but it's just not politically feasible to do so right now.
I think that's the wrong approach, at least for some of the savings schemes, in particular the girl child scheme and the senior citizen scheme. Schemes like these have a low upper limit in terms of the amount that can be deposited and earned, and have a specific social purpose and utility. The government spends a lot of money on a lot of things, many of them useless. A small extra outgo of interest on such schemes should be seen as a social expenditure rather than some great anomaly in the economic policy of the government. The banks that most desperately need good margins are the same ones who have gifted away thousands of crores to large corporate borrowers who won't return the money. If the logic is that the senior citizen or the girl child needs to be paid close to negligible real returns because the likes of Vijay Mallya won't repay their loans, then Mr Jaitley is right in saying that this is politically untenable, as it should be.
Large swathes of our population save through fixed income instruments of one sort or another. No matter which direction the RBI's and the government's policies take, they must ensure that reasonable real rates of return are available on these.
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