Cut in interest rates on savings schemes hurts common man

The Department of Economic Affairs, Ministry of Finance in exercise of the powers conferred on it by Rule 9(1) of Government saving promotion General rules, 2018 issued an office memorandum dated 31 March, 2020 that it had “revised” the interest on small savings schemes for the first quarter of FY 2020-21 starting on 1 April.

It was more than a routine revision. It was a rude shock for the citizens already reeling under the coronavirus outbreak, impact and duration of which is going to last for a very long
time. The reduction in interest rates (which range from 70 basis points to 140 basis points -100 basis points is 1%) was on the cards for some time as the Economic Affairs Secretary Atanu Chakraborty had hinted in February that there might be a revision in small savings rates soon.

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The government had been mulling reducing interest rates on small savings schemes for some time now as the distortion in interest rates between Bank deposits and Small savings schemes was becoming too apparent and would not be allowed to continue for long. Now it feels that the reduction will lead to quicker transmission of the cut in repo rates announced in the monetary policy by the Reserve Bank of India (RBI) last week, and facilitate banks to lower their lending rates.

RBI had slashed its key policy rate by 0.75% to 4.40%.

Recommendations of Shyamala Gopinath committee

The Economic Survey too had earlier suggested that the interest rates on the small savings schemes should be reduced to bring them on par with the interest rates prevailing in the economy as per the recommendations of Shyamala Gopinath Committee.

The committee constituted in 2010 on Small Savings Schemes had recommended that secondary market yields on Central Government Securities of comparable maturities should be the benchmark for the interest on various small savings instruments.

The committee in its report had recommended for 0.25% spread between market yields and the rates for the small savings schemes. The yields on the benchmark 10-year government bonds had dropped to 6.14% recently and so the cut in interest rates on small savings schemes was imminent. The PMC Bank saga, the recent equity market mayhem and the defaults on debentures by issuers were making the small savings schemes very attractive and low hanging fruits.

While the interest rate on savings deposit is unchanged at 4%, the interest rate on Senior Citizens savings scheme has been cut sharply from 8.60% to 7.40% – a reduction of 14%! It
is a cruel joke on senior citizens who have to fend for themselves at a time when human life expectancy is going up in India and Indians are living longer.

As per the National Health Profile report, life expectancy in India has increased from 49.7 years in 1970-75 to 68.7 years in 2019. Among other things, it says that 8.5% population are in the age group of 60 to 85 plus years. Is the government thinking that since it affects only a small percentage of population it does not matter?

Without any social security measures unlike in the western countries and with rising medical expenses the plight of elderly people is understandable. For a senior citizen depending only on interest income and assuming that he is investing Rs 15 lakh in Senior Citizen Savings Scheme and Rs 20 lakh in MIS, the reduction in interest rate will result in a loss of interest income of Rs38000 per year! Even the reduction in interest rate on the popular MIS from 7.60% to 6.60% and on a five year Term deposit on which tax benefits are available under Sec 80C of IT Act from 7.70% to 6.70% is going to hurt the common man.

That said the government has to come out with special schemes with higher interest rates for senior citizens and provide them with succour at a time when there is so much uncertainty and damage caused by COVID-19.