Money9 Edit | Interest rates on small savings: Leave them untouched
The government should not attempt a reduction in interest rates till the infection goes away and the economy is back on the rails
Six weeks after Union finance minister Nirmala Sitharaman rolled back the instruction to slash interest rates, discussions have again started on the need to bring them down. Perhaps textbook economic logic dictates so. Perhaps there is a compelling argument to reduce interest rates on small savings to bring down cost of funds of banks, so that they can lend on easier rates, to boost consumer demand across sectors such as housing, consumer electronics and automobiles that will, in turn, pull out large sections of the economy out of the rut.
For the government, tormented by rising borrowings and fiscal stress, any reduction in cost of borrowings is welcome relief. A recent study said in 2020-21 as much as 26% of the fiscal deficit of the Centre was funded by small savings. However, there are equally cogent arguments concerning the bottom of the pyramid and financial inclusion that outweigh, at least temporarily, the compulsions of fiscal rectitude.
Also read: Further cut in small saving scheme interest rates will hurt the ordinary saver
Pummelled by two back-to-back waves of a killer infection crores have lost jobs, suffered wage cuts and have been pushed below the poverty line. With the possibility of a third wave looming, this is the time to put fiscal discipline on the backburner and stand with the vast mass of suffering population.
Numbers from the postal department alone reveal that there are about 37 crore individual accounts, a number which is half of the total population of entire Europe. There is a large number of people, who invest in small savings instruments in banks and are outside this number. Many of them are superannuated people without any earning opportunities, who depend critically on the interest income from small savings instruments.
This is the time to facilitate the appreciation of capital among the members of these vulnerable sections. The interest rates on small savings should continue for the time being.
Also read: Small savings schemes rates — Time for a rate cut to boost real estate?