An oversight or planned execution?

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By Shivanand Pandit

In the quickest ever rollback, the union government reversed its action on small savings interest almost overnight. Restoring the rates through a Twitter message, the finance minister, Nirmala Sitharaman termed the move an “oversight”.

On 31st March 2021, the government cut interest rates on all small savings schemes comprising the Public Provident Fund, term deposits and a host of welfare schemes for senior citizens, girl children and farmers. The new rates were to come into effect from April 1. However, on April 1  morning the government took back its words and the old rates restored.

The interest rate cuts were significant, as it ranged from 40 to 110 basis points across various savings schemes and in the case of the PPF the interest rate dropped to the lowest since 1974. It was the second instance that interest rates on small savings instruments were reduced in the past 12 months. Earlier, the government had lowered rates of small savings schemes by 70 to 140 basis points for the April to June quarter of the financial year 2020-2021.

Through Twitter the finance minister mentioned that interest rates of small savings instruments would remain the same and the orders released by oversight was cancelled.

The National Small Savings Fund (NSSF) decides the manner in which the deposits from several small schemes credited have to be invested. The NSSF invests the collected funds in the special government securities of the centre and states such as oil bonds, food bonds, fertilizer bonds etc.

NSSF also invests in bonds issued by the Food Corporation of India, National Highways Authority of India, Air India, IRFC, PFC and REC. The NSSF has to earn sufficient earnings on its investments to meet its payment obligations. Any shortfall in the returns has to be shouldered by the union government. After 2014 states started raising funds from the market rather than borrowing from NSSF.

The interest payment outflow in the financial year 2019-2020 on small savings under the NSSF was approximately Rs 1.11 crore whereas gross deposits gathered in the schemes was around Rs.23.48 crore. It is projected that the interest outflow will rise to about Rs.1.58 crore for the financial year 2020-2021. This may be the one of the reasons why the government decided to cut the interest rates sharply.

While withdrawing the decision on interest rate cut the finance minister mentioned that it was on account of ‘oversight’. There cannot be a more shocking remark on the decision-making procedure in the government.

Now the question is whose oversight? Are other decisions made in a similar manner? Are all Indians so dimwitted to accept
this statement?

Many have now realised that the government did not think of the unfavorable impact of its original decision of interest rate cut on the lives of small savers like the senior citizens. The concern of unpleasant electoral effect resulted in the reconsidering the original idea. Senior citizens are dependent on their small savings. Their status has become more dangerous in the last one year due to the pandemic and the lockdown.

The government by reversing its decision has revealed itself as cunning and distrustful. Moreover, no one would be shocked if the rate cuts return after the election.

Forewarning

Although investors in small savings instruments got relief after the rollback of the decision many industry experts are of the opinion that the relief may only be momentary. The chief executive officer of Equirus Wealth Management, Ankur Maheshwari said, “The government wants lower interest rates within the economy. The existing rates have been retained for only a quarter, so they may be reconsidered once that period is over, or a little later.”

Earlier the Shyamala Gopinath Committee had come out with the guidelines for small-savings rates. According to the framework, the average return on government securities (G-Secs) of a comparable maturity should be computed over the previous year and then a 25-basis point spread should be provided above it. Considering this, the chief financial planner of Plan Ahead Wealth Advisors, Vishal Dhawan said, “Since a mechanism for aligning small-savings rates with market rates already exists, it is only a matter of time before it is fully implemented.”

An investor one cannot do much if the government declares the interest cuts over the next few months. The investors should invest in a high-interest-yielding small savings instrument that has a quarterly compounding incidence.

If the latest rate reduction had gone through, the most disturbed would have been individuals in West Bengal, an election-bound state. The state accounted for 15 per cent of total funds into small savings schemes in 2017-2018.

Ours is a savings economy. The government wants to make it a borrowing economy as in the developed nations. However, the developed nations have protection grids like unemployment insurance which do not subsist in India. People save throughout their lives to get over a bad patch or for retirement. It is these savings that are under assault from
the government.

Senior citizens and retirees are finding it extremely difficult to maintain their standard of living as their savings are getting fast vanished. The government wants only trade and industry to get funds at an economical rate. But the depositors must also get a fair rate to stay alive. The main thing the government should know is- “Do not interfere with the middle class’s superannuation-linked savings, whatever a narrow reading of economic theory might recommend.

The writer is a tax specialist, financial
adviser, guest faculty and public speaker based in Goa. He can be reached
at [email protected]