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No small change

Introduction

  • Indian households’ financial surpluses parked in small savings schemes operated by banks and post offices get a significant boost this quarter.
  • The government has raised the returns on most such schemes by 0.1 to 0.7 percentage points.
  • This constitutes the third successive hike in the rates that are reset each quarter.
  • The hikes follow a long pause in rates since April 2020.
  • As the central bank started rate hikes last year and government bond yields hardened, there was a widening gap between the extant rates and the rates prescribed by the formula recommended by the Shyamala Gopinath panel that was officially adopted in 2016.
  • This analysis will examine the impact of the rate hikes, the rates, and policy considerations.

Impact of Rate Hikes

  • The rate hikes will benefit small savers who have parked their financial surpluses in small savings schemes operated by banks and post offices.
  • The hikes will offer higher returns on their savings and help them earn more interest income.
  • The hikes will incentivize savers to invest in small savings schemes and increase their savings.
  • The hikes will reduce the gap between the extant rates and the rates prescribed by the formula recommended by the Shyamala Gopinath panel.
  • The hikes will help to mobilize household savings and contribute to the growth of the economy.

Rates of Small Savings Schemes

  • The rates of small savings schemes are reset every quarter.
  • The latest hikes range from 0.1 to 1.1 percentage points on eight schemes.
  • The hikes came after a long pause in rates since April 2020.
  • The gap between the extant rates and the rates prescribed by the formula recommended by the Shyamala Gopinath panel is zero or marginal on six schemes.
  • For five schemes, the gap is still at 5 bps to 82 bps.
  • The PPF rate has been frozen at 7.1% for three years now and should have fetched 7.72% last October and 7.76% for this quarter as per the formula.
  • The returns on the Sukanya Samriddhi Account Scheme were hiked to 8% this quarter.
  • The General Provident Fund rate for government employees has been retained at 7.1%.
  • PPF savings are capped at ₹1.5 lakh a year, and the Budget raised the limits on a couple of small savings schemes to multiple times that.

Policy Considerations

  • The government mandarins indicate they are not inclined to hike the PPF rate as its returns are tax-free, unlike in the case of other schemes.
  • The policy position should be publicly restated if that is the case.
  • An even-handed and transparent policy approach rather than quinquennial bouts of relief for small savers would inspire more confidence.
  • It is perhaps no coincidence that the last time small savings rates were hiked across the board was in January 2019, ahead of the Lok Sabha battle.
  • Several States vote this year, and the general election looms in 2024, which may have influenced the latest hikes as a feel-good device.
  • A more consistent and predictable policy approach to small savings schemes would promote stability and attract greater investment in the long run.

Conclusion:

  • The recent hike in returns on most small savings schemes operated by banks and post offices is a welcome move for Indian households. The hikes, which came after a long pause in rates since April 2020, have narrowed the gap between the extant rates and the rates prescribed by the formula recommended by the Shyamala Gopinath panel that was officially adopted in 2016. However, the gap still exists on some schemes, such as the Public Provident Fund (PPF), whose rates have been frozen at 7.1% for three years now. The government's reluctance to hike the PPF rate due to its tax-free status needs to be restated publicly to bring clarity to the issue. An even-handed and transparent policy approach would inspire more confidence among small savers rather than quinquennial bouts of relief.Top of Form