India’s savers also need a stimulus (COVID-19 fallout and rescue measures)

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 India’s savers also need a stimulus (COVID-19 fallout and rescue measures)

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• Borrowers have clout: In many crises, it is seen that borrowers have managed to get their way with governments worldwide. Interest rates get reduced, and in that process, savers are hurt badly.
• COVID-19 situation 2020: Central Banks are now helping the indebted by reducing rates again. India's RBI does the same. The March MPC outcome proved it – repo rate came down to 4.4 %, lowest in 20 years.
• Bank interest rates: The rate of their decline is faster than that of policy rates.

1. SBI now gives just 5.7% on 3 year deposits. Savings accounts pay less than 3%.
2. And the Central govt. too has reduced the rates for small savings schemes.
3. Regular income earners and retirees depend on post office schemes, which now pay just 5.5 - 6.6 per cent. This, when households need more cash flow, not less.
4. Real returns are negative for savers. Why? Consumer price inflation in India was in the 5.5 - 7.6 % range. (higher than deposit rates)

• So what is happening: Thus, rate cuts punish those who refuse to take loans and do not spend much. They have built savings for the future. The number of savers in India is much higher than the number of borrowers. Indian governments don't work on this logic.
• West versus India: The Western households thrive on leverage, but Indians do not. That culture is nascent here, but well-developed there. So Western governments work on rate reduction during crises.

1. As per BIS data, India has the lowest household debt to GDP ratio in the world (12% of GDP approx.) This is for bank credit.
2. For the US, UK and Euro, the rates were 75%, 84% and 58%. World average was 60%.
3. For India, if we add up bank credit, NBFC lending and housing finance, it becomes Rs.21 tr + Rs.5 tr + Rs.10 tr, it becomes Rs.36 tr, or 19% of GDP. Quite low from global standards.
4. So should rate cuts really be the strategy during crises?

• RBI data on savings: For 2017-18, Indians added Rs.29.4 tr in savings, of which Rs.18.7 tr was financial savings. Financial liabilities added were Rs.7.4 tr. (only 40%) 

1. In 2019, 185 crore deposit accounts existed in SCBs, with Rs. 71 tr in them
2. Only 8.4 crore retail loan accounts with Rs.21 tr existed! So for each 1 rupee of loan, Indians deposited Rs.3.4.
3. So rate cuts are hurting far more Indians, than helping them.

• Rate cuts for the informal: Those who borrow from moneylenders remain insulated from any benefits of repo rate cuts.
• So what is the ideal strategy: Recognise the need of the far more numerous depositors in India.

1. If rates are reduced on small savings, at least reduce the tax rates on the earnings. Ideally, give a tax holiday. The rich invest more in Mutual Funds and in shares, and tax rates are more favourable there!
2. Change the quantitative caps on small savings schemes like Post Office Monthly Income Scheme (Rs.4.5 lakh) and SCSS (Rs.15 lakh). Raise those limits. Banks won't like it, but competition is good for savers!
3. Issue tax-free COVID-19 bonds of 1- and 3-year duration, only for retail savers. Give higher rates. Generate fiscal resources to battle the crisis.
4. Remember that while trying to recover, Indian economy will need its savers to help fund both consumption as well as investment. The 2016 RBI promise of giving 1.5 to 2% higher returns to savers over retail inflation must be met.

• Summary : All rescue packages are designed for borrowers, and not savers, who are actually far more numerous in India.

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