Catch 2017: A year when the small saver was squeezed further

If you are in India and invest in the stock market, 2017 perhaps was great for you. But what about those who still depend on small savings? Not so rosy a picture.

Consider the differences: The BSE Sensex jumped 28% this year; the NSE Nifty a percentage point more. More than 9 lakh systematic investment plans (SIP) accounts were added on an average every month. SIP funds shot up to Rs 5,893 crore from Rs 3,973 crore a year ago.

On the other hand, the Union government reduced interest rates on small savings scheme; banks too cut returns on fixed deposits. These are instruments on which a large section of the country's working class depends.

In fact, since April 2016, small savings rates have been recalibrated quarterly and returns have fallen more than 110 basis points.

Term deposits of one-five years now return 6.6-7.4% a year whereas the five-year recurring deposit pays 6.9%. Public Provident Funds and National Savings Certificates now fetch 7.6% a year while Kisan Vikas Patra yields 7.3% (in 11 months). Sukanya Samriddhi Account, meant for encouraging the girl child, has also taken a beating and its return is now down to 8.1% from 8.3%.

The idea behind the cuts

The rates were re-calibrated to link them to inflation and yield on government securities. That way, the government claims, any rate above 7% means a positive rate for depositors.

For interest rates to be positive they have to be higher than the inflation rate. Retail inflation in June was less than 5%. So, by that logic, the depositors benefitted by 2 percentage points.

The repercussions

Small savings are meant to be safe avenues of investment to a large section of the society that does not have a capacity to invest in riskier instruments like corporate bonds, stock markets, and mutual funds. If we look at the subscriber base of these schemes, it becomes evident that states with lowest per capita income in India have the highest collections under these schemes.

For example, West Bengal (per capita income of Rs 78,903 per annum in 2016-17) and Uttar Pradesh (Rs 43,861) reported collections worth Rs 62,419 crore and Rs 49,966 crore, respectively, from such schemes. Richer Gujarat, on the other hand, (per capita: Rs 1,24,678) notched up only Rs 35,648 crore.

“Continuous reduction of rates in small savings schemes will lead to lower returns for pensioners and those who cannot invest in stock markets,” says Lekha Chakraborty, an Associate Professor with National Institute of Public Finance and Policy.

“The government may want people to invest more in equities, but the strata that invests in small savings schemes will not move towards such instruments. They will lose out on their long-term financial requirements,” she argues.

Change of perspective

There was a time when the government wanted to habituate the lower and the lower-middle classes to save. Most people from those segments don't have any source of income post-retirement. Therefore, a few thousand rupees kept aside every year for 10-15 years let them build a decent corpus for the future.

“Whenever there is a change in the government's perspective towards investment schemes there are some losers and some gainers,” says NC Saxena, former member secretary of the Planning Commission.

“With the government reducing rates on small savings schemes, those who rely only on interest income to survive, especially the pensioners, will be the losers. They may have to shift towards riskier assets or illiquid instruments of stock markets or illiquid assets of the property market,” he adds.

How risky is risky

Jayati Ghosh, a Professor of Economics at Jawaharlal Nehru University, says people might fall for ponzi schemes in search of higher returns.

“The poor don't understand the stock markets. It is daunting for them. But ponzi scheme operators may con them into investing, promising high returns. We know why scams like Sharadha happen. People from the poor strata fall for them in search of high returns.” She called the step to reduce interest rates on small savings retrograde.

Will 2018 be any different? Only if the government changes its mind.

Edited by Joyjeet Das