On 31st, March 2021 Office Memorandum was issued as usual with the signature of Deputy Director National Savings late-night reducing rate of interest on small savings schemes of the government by half a percent to about 1%. On the very next day i.e. on 1st April at about 7:30 a.m. Finance Minister Smt. Nirmala Sitharaman withdrew the said office memorandum through Twitter stating that the same was issued through oversight. This was unusual. It goes without saying that in no way this was oversight since such orders are passed only after passing through due process, but may be on realizing the fact that five states are going through elections and this decision may have an adverse impact on voting pattern, ruling dispensation thought it fit to backtrack. At the same time as all are aware once the election results are over government will revisit the issue and ultimately reduce the rate of interest on national small Saving deposits.
If you compare the rate of interest on small savings deposit which are available today in relation to March 2015 this reduction works out to be around four percent, which it means this reduction amounts to be reduction in income levels by about 50% and thus income levels of those who are solely dependent on interest income becomes miserable.
This reduction of interest rates on small savings deposits is being justified by the government since the rate of interest on Bank deposits have gone down. Banks are justifying this reduction since rate of interest on banks advances have gone down. The rate of interest on advances have gone down since Reserve Bank of India has reduced REPO rate with an expectation that banks will reduce the rate of interest on loans and advances. This is the policy prescription of Reserve Bank of India and government together thus to encourage credit off take and Industry. This is fair enough provided inflation is reasonably arrested but on the one side inflation is increasing and on the other side interest income is getting reduced resulting into erosion in the real income of the depositers & deterioration in standard of living. If we Factor inflation, present rate of interest on savings deposits is negative.
Government is of the view that interest rates on savings are depressed so that people will tend to spend more which will help in increasing demand for the goods and services and thus will revive the market and the economy. But in reality it is the senior citizens who are suffering most. Who will defend Depositers interest?
As it appears Indian economy is passing through vicious circle.
On the one hand, the government wants to increase revenue and on the other side government wants to reduce the spendings in which major component is interest payment. As far as revenue generation is concerned government has only one avenue that is of success on petrol and gas while on interest payment there is no scope for reducing debt raised by the government rather during the period of pandemic government is forced to raise the debt further. Thus as a last resort Government attempted to reduce the rate of interest on deposits but is resulting into a reduction in purchasing power in the hands of customers and thus government won’t be able to derive desired effect of raising demand but ultimately it is the saver who is becoming a casualty.