Strengthening the National small savings schemes

Synopsis:  The government need to implement the recommendation of high-level committees in determining the interest rate of small savings schemes

Background

• Recently, the government notified on reducing the interest rates on National small savings schemes.
• However, the decision to reduce the interest rates on small savings schemes was reversed within 12 hours of notification.
• Reducing the interest rate of National small savings schemes will adversely impact middle class, lower middle class, and lower-income groups. As they are already facing the crisis of job losses and higher food prices due to the Pandemic.

Types of Small saving schemes in India

1. Post office Deposits
2. Savings Certificates: National Savings Certificate and Kisan Vikas Patra
3. Social Security Schemes: Public Provident Fund, Senior Citizens Savings Scheme, and Sukanya Samriddhi Account.

Significance of Small Saving schemes;

• One, Small savings schemes (SSS) have contributed to overall economic growth. Because money pooled from SSS has been used by center and state governments to fund development programs.
• Two, they are an important source of household savings. (social security net)
• Three, they offer a safe and secure source of income to senior citizens.

How the Interest rate of National small savings schemes are decided currently?

• The small savings rates are linked to G-sec yields (the rate at which the government borrows money through sovereign bonds) currently. Further, it is revised quarterly.
• The rationale for linking small savings rates to G-sec is that money collected through these schemes is invested in central and state government securities.

What are the recommendations of various high-level committees in this regard?

1. Various committees such as the Y V Reddy committee, the Rakesh Mohan committee, Shyamala Gopinath Committee have recommended linking small savings rates to G-sec yields.
2. The important recommendations of these committees are, For example,
   • One, The Reddy committee suggested small savings rates should be reset once a year. Instead of the current practice of revising it quarterly.
   • Two, the Reddy Committee recommended that the rates should never be revised more than 50 basis points. On the other hand, the Gopinath Committee recommended that the rates should never be revised more than 100 basis points in a year.
     • However, due to quarterly revisions, many times the basis points have reduced by more than 100 owing to low G-sec yields.
     • For example, Interest in the Senior Citizens’ Saving Scheme was cut to 7.4 percent, effective from April 2020, from 8.7 percent before.
   • Rakesh Mohan Committee recommended using a weighted average of G-sec yields over the preceding two years in calculating interest rates of SSS.
3. However, the present move is contradictory to the current approach of the Finance ministry.

The justification is given by the government for reducing the interest rate of SSS:

• One, people’s dependence on small savings schemes had significantly declined due to the expansion of the banking sector.
• Two, for those who used small savings as safety nets there were other alternatives such as an old-age pension scheme.
• Three, a market-determined rate will provide a fair outcome. But this is not true because many times RBI has intervened in the market to reduce G-sec yields that directly affect the interest rate of SSS.

What is the way forward?

• One, the government Should reset the rates annually in line with various high-level committee recommendations.
• Two, the government should keep the revision under 100 basis points and allowing small savings rates a spread of at least 50 basis points over and above the G-sec yields.
• Revisiting the suggestion made by the Rakesh Mohan Committee to use a weighted average of G-sec yields over the preceding two years.

Source: Indian Express

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