Yes, that's what economic thinking is.
After announcing the rate cuts, RBI governor had asked the Finance Ministry to take a call on small savings interest. I had then tweeted saying that this move will hit millions of people, mostly from the lower strata, who have been saving every penny they could afford. But then, in an era of economic liberalisation, the poor don't matter. What matters is the economic interests of the rich and affluent. The lowering of EMI for those who have to pay home loans or car loans is big news but cutting the interest of millions who invest in small savings is simply blacked out.
The Times of India (Oct 4, 2015) has a front page report under the title: Rate correction must when inflation down wherein the economic affairs secretary Shaktikanta Das is quoted as saying: "In a high inflation regime, you had a certain interest structure for banks as well as the small savings scheme. But when inflation is down, interest rates naturally need correction." (http://timesofindia.
I find this to be simply absurd.
The argument is that a higher interest on small savings makes it difficult for banks to lower their deposit rates and hence their is pressure on their net interest margins and profitability. So I wasn't wrong. The banks have been given an advantage of 125 bps cut this year and have only passed partly the benefit to industries and big lenders. But in return the burden will be passed on to the small investors. They have to bear the penalty for no fault of theirs. Robbing Peter to pay Paul, isn't it?
My question is why penalise the small investors?
Till January 2015, State-wise collections in small savings across the country has netted Rs 1.97 lakh crore. This represents a 19.76 per cent increase over the previous year collections. For a country which is desperately scouting for foreign direct investment (FDI) often bending backwards to accomodate the requests, shouldn't the focus be on raising domestic investments? For any sensible economist, encouraging more and more people to save money should be the directive principle. Lowering the interest rates so that they save less and consume more is simple stupidity. It only shows how cleverly the direct benefit transfer scheme works -- take the cash out of poor people's pockets and help to build corporate coffers. But unfortunately, as I have been often saying, there is hardly any convergence between common sense and economic sense.
Take for example the staggering amount the global fashion company H&M clocked on the first day of the opening of its first store in India. According to news reports, it made Rs 1.75 crore on the very first day from sales. This clearly shows there is a lot of money in India. All the Govt needs to do is to tap on this. All efforts should therefore be to encourage people to go for savings.
Recently, the Govt waived Rs 40,000-crore MAT for foreign institutional investors (FIIs). I am sure you'll agree that there is hardly any justification for waiving MAT for FIIs who have the ability to pay. Whereas just because the common person on the streets will not be able to raise hue and cry, the Govt decides to clamp down on small savings earnings. At the same time, to say that banks would have otherwise suffered is all bunkum. In September alone, Govt infused Rs 20,000-crore into the banks and the successive reduction of repo rate has not been passed by the banks to the lenders in the past, which means, the banks have kept their balanced sheets in order.
If a fall in the inflation rate is the factor then I would like to know why did the Govt give a DA installment of 6% to its employees just before the Bihar elections? Shouldn't the DA be also linked with inflation rate? And why not go for proportionate cut in the basic salaries of the Govt employees? If the inflation is down, why is the Govt keen to bring in the 7th Pay Commission? Just because these employees will make life difficult does not mean that we sacrifice all principles of justice and equity.
Instead, the thrust should be on raising more domestic investments. Give a higher interest rate to the small investors, and you'll see there would be a less need for FDI. The Govt itself can provide an interest subsidy to encourage people to invest more in small savings. #