Any further decision to cut interest rates should come after consideration of the heavy dependence of Indian investors on national small savings schemes
Today the population of the country is about 121 crores, out of which 83.3 crores people live in rural areas, which is 69 per cent of the total population. 37.7 million people live in urban areas, which is 31 per cent of the total population. The literacy rate of women in rural areas is 50.6 per cent, while in urban areas the rate is 76.9 per cent. At the same time, the literacy rate of men in rural areas is 74.1 per cent, while in cities it is 88.3 per cent.
It is clear from these figures, still, a large population of the country does not understand 'investment'. Most people still invest in banks, post offices, public provident fund, Sukanya Samriddhi Yojana, Kisan Vikas Patra, National Savings Letter etc., as these are safe and attractive options for investment. They do not understand the intricacies of the stock market. According to an estimate, only 2.78 crore Indians invest in the stock markets, which is just 2 per cent of the country's population. Even in developed countries, the situation is not very good. For example, only 50 per cent of Americans prefer to invest in the stock market.
The National Savings Paper (NSC), Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) are the most popular deposit schemes among retail investors, as they yield the highest return on investment. At present, interest is being given on NSC at the rate of 6.8 per cent on an annual basis, while interest is being given at a maximum rate of 5 to 6.5 per cent in banks. If investors are depositing income tax under the old system of income tax, then they can get more benefit from NSC, because under the old system, investing in NSC up to a maximum of 1.5 lakh rupees gives income tax exemption.
In PPF, interest is given on an annual basis at the rate of 7.1 per cent. For investing in PPF, interest is paid on the entire deposit instead of the investment made in any quarter or financial year. Not only this, under Section 80C of Income Tax on the amount deposited in PPF, income tax exemption is also given on investment. Also, on completion of the maturity period, which is 15 years, there is no income tax on the matured amount. Thus, like NSC, PPF becomes even more profitable for investors due to income tax exemption.
If someone has a girl child below 10 years of age, then they can open an SSY account in the bank. Under this scheme, interest is paid at the rate of 7.6 per cent, which is calculated on an annual basis. Its duration is 15 years from the date of opening the account or till the daughter reaches 21 years. In this scheme also, income tax is exempted according to the Income Tax Act and there is no income tax on the maturity amount. The exemption in income tax under the Income Tax Act increases the percentage of benefit from Sukanya Samriddhi Yojana.
The post office savings scheme offers interest at the rate of 4 per cent, in which the interest is calculated on an annual basis. Interest is paid on post office fixed deposits at the rate of 5.5 per cent for 1 year to 3 years, whereas from the rate of 6.7 per cent for 5 years period. Interest is calculated every quarter. At the same time, interest is given at the rate of 5.8 per cent on the post office frequency deposit scheme of five years, which is also calculated quarterly. In the preferred citizen deposit scheme, interest is calculated every quarter at the rate of 7.4 per cent, while in the post office monthly income scheme, interest is calculated on monthly basis at the rate of 6.6 per cent. Interest in Kisan Vikas Patra (KVP) is calculated at the rate of 6.9 per cent. The rate of interest is calculated on an annual basis.
To promote savings at the national level, the National Savings Institute has been formed, which works under the Department of Economic Affairs, Ministry of Finance. The job of this institute is to encourage the public to invest in national savings schemes. For this, this institute works continuously to promote government schemes at the national level. Most people in India prefer to invest in government small savings schemes, as the government pays attractive interest on the money invested in these schemes and exempts income tax. Government Small Savings Schemes are operated through a vast network of post offices and government banks.
People invest in government small savings schemes, which are deposited in the National Small Savings Fund (NSSF). This amount is used by the central and state governments to meet their financial deficit and invest the remaining amount in government securities. During the financial year 2017-18, the people of the country invested a total of Rs 5,96,402 lakh crore in government small savings schemes. Obviously, due to the high-interest rate of small saving schemes, the government is paying more interest to investors on their deposits, but it is earning less from the deposit amount. Due to this, the government is unable to maintain fiscal balance during the Corona period. For this reason, interest rates on government small savings schemes were cut by 1.1 per cent on March 31. This decision had been taken for the first quarter of 2021-22, which had started on 1st April. However, the government later had to back down from its decision.
According to the most up-to-date data available on the National Savings Institute website as of November 2018, the people of West Bengal have invested the most in government small schemes. At the same time, people of five states, such as West Bengal, Kerala, Assam, Pondicherry, and Tamil Nadu, where assembly elections are being held, have invested 25 per cent of the total investment in these government small schemes. Therefore, it is being speculated that after the assembly elections in the states are over, the government can again cut the interest rates of the government small savings schemes because now cutting the interest rates can have a negative effect on the election result.
The corona pandemic has reduced the government's revenue source, but it is also true that this epidemic has also reduced the income source of the public. It is clear from the data that in a big country like India, a large section of the country still like to invest in government small savings schemes because investing in these schemes keeps their investment safe and gives a certain return. United Nations Population Fund had released a report in 2019. As per this report, 8.16 crore people in India were above 65 years of age. If one per cent of this population i.e. 8,16,000 elderly people invest in such schemes, they will have to face problem in sustaining their livelihood after cutting interest. Hence, the government should consider these important facts before cutting the interest rates.
The writer is the Chief Manager in the Department of Economic Research at the Corporate Centre of SBI, Mumbai. Views expressed are personal