AA Edit | Small savings U-turn: Bad economics, bizarre optics

It is a bizarre moment for policy. Since Assembly elections are on in many states, evidently the fear of electoral backlash has forced an about turn by the Centre in something like 12 hours flat. On Wednesday night, the government announced substantial cuts in interest rates for small savings, meaning instruments such as PPF, post office savings, bank fixed deposits, Kisan Vikas Patras, and Senior Citizen Savings Scheme which ordinary people use to save their lifelong earnings. On Friday morning, the announcement was reversed in a tweet by Union finance minister Nirmala Sitharaman.

Small savings, or common people’s savings, are critical. They constitute as much as 60 per cent of all savings in the economy. The savings rate in the country was already touching a 15-year low, with household savings (small savings) declining steadily on account of shrinking interest rates, especially since early 2020. If the savings rate is low, investments will be inadequate. As a result of low investment funds available within the country, India has had to take recourse to external borrowings. So, that’s how important small savings are.

The core inflation rate in India was six per cent in January. The proposed cuts in interest rate for small savings would have brought the real value of most of these savings into negative territory. So, why was the finance minister unmindful of the daily needs of ordinary Indians when it is well known that millions of people depend on the interest earnings from their savings to meet their everyday needs?

This is not just bad poll-time optics, hurting the lower end of society is deplorable political economy. During the year-long pandemic, and for three years before that (as a consequence of demonetisation), it is the poor, the middle classes, and small and medium businesses that really suffered in terms of job losses and output losses. They have struggled to survive. In contrast, the richest Indians — especially big industry — have made handsome gains. And yet, the government’s policy on interest rates, which is done quarterly, singled out small savings for punishment.

A probable reason is that the government may have calculated that if the interest rates are pushed down, it can borrow on better terms to meet its needs. Which means the ordinary people, rather than the better off citizens, were being asked to shoulder the burden of government borrowings which for the financial year 2021-22 is slated to be 12.06 trillion rupees. In effect, the section of the population which is already teetering on the brink was expected to surrender more to finance the government’s plans, as compared to the big boys.

The plan was jettisoned overnight, but even at the prevailing rates of interest for small savings, the ordinary householder is eking out a hard living. Is the present finance minister responsible for the poor woman’s misery, or is it that the policy set responsible for accelerating poverty pre-dates her assuming charge of finance?

Policymaking is highly centralised in the present set-up. Whether it is finance or foreign affairs or defence, or matters concerning home, agriculture or industry, it is widely thought that decisions are made on high. That is where answers ought to be sought for the goof-up. On account of elections, the panic button was pressed at the last minute. But what happens in the next quarter will be keenly watched.