Finance minister Nirmala Sitharaman’s statement on her ministry’s order on cutting small savings’ interest rates being issued ‘by oversight’ is, ironically, an honest admission of how these rates are mostly driven by political consideration; so, to the extent there was an ‘oversight’, it was that no one paid heed to the fact that various assembly elections were being held and that this cut would be used by the Opposition to show how little the BJP cared for the common woman. The question of course is that, when the elections are over, will the government once again cut these rates that are quite out of sync with what they should be? That the high rates on small savings was becoming a problem and were making it difficult for banks to lower their deposit rates – and hence lending ones – is obvious from the fact that the Shyamala Gopinath (she was RBI deputy governor then) committee on this was set up more than a decade ago. Indeed, while the recommendations were ignored by most governments, when he was finance minister Arun Jaitley once again promised that the recommendations would be followed. After a few cuts along the recommended lines, though, the effort was mostly given up, and interest rates on small savings have generally remained much higher than they are supposed to be.
The Gopinath committee had recommended an automatic market-driven formula for these rates, and had said a 25bps spread over the average yields – over the previous year – on GSecs of equivalent tenure could be given for most instruments; the spread was to be hiked to 50bps for 10-year NSCs, 75bps in the case of the Sukanya Samridhi Scheme and 100bps for senior citizens. That this was hardly followed was brought out in the RBI’s monetary policy report last October when it said that the refusal to bring down rates resulted “in a wedge of 40-120bps in Q2 and 82-203bps in Q3 … with implications for monetary transmission”. In the case of senior citizen schemes, RBI said, that while the average G-Sec rate in the reference period was 5.29% and this meant the interest rate should have been 6.29%, the actual rate was 7.4%. In the case of one-year deposits, interest rates were higher by a whopping two percentage points. For the 124-month Kisan Vikas Patra (KVP), the equivalent G-Sec rate was 6.02 while the interest rate paid on this was 6.9%.
So, when, on March 31, the finance ministry cut rates of various small savings schemes, it was merely doing what it was mandated to. In the case of the KVP, for instance, the 10-year yield is 6.2% now but was 5.9% on December 31, 2020 and 6% on September 30; so, the interest of 6.9% on it was clearly too high and the ministry was right to lower it to 6.2%. Similarly, with one-year paper at 3.8% right now – 3.4% in December and 3.7% in September – the post office rate of 4% needed to be cut to 3.5% as the finance ministry had originally proposed. The government is free to keep small savings rates high, but it cannot then want complete monetary transmission, nor can it claim that interest rates in the country are market-driven.