It seems that after months of speculation, the axe is finally to fall on savers who use small savings schemes like PPF, post offices deposits and the Senior Citizens Savings Scheme. There a number of news reports that the government will reduce the interest rates paid on these schemes. This will be done by reducing the gap with the rates on government securities of the same tenure, as well as by resetting their rates to this gap every quarter rather than every year, as has been done till now.
The driver for this action seems to be the bank's continuous complains about being unable to attract enough deposits, which in turn is said to be a reason behind their inability to reduce lending rates. There's no official announcement about this, and the government should be cautious about lowering rates. Let's not end up in a situation that where small depositors are subsidising the recovery from bankers' past indulgence of big businesses.
Some of these schemes like the girl child scheme and the senior citizen scheme should be seen in the spirit they need. These have a low upper limit in terms of the amount that can be deposited, and have a specific social purpose. In India, governments spends a lot of money on a lot of useless things. In contrast, a small extra outgo of interest on such schemes should be seen as a social expenditure rather than some huge distortion in our economy. The banks that most desperately need good margins are the same ones who have gifted away thousands of crores to large borrowers who won't return the money. If the logic is that the senior citizen or the girl child should be paid negligible real returns because the likes of Vijay Mallya won't repay their loans, then that should surely be politically unacceptable.
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