Blunt instrument

In the last month the Reserve Bank of India and the Finance Minister have both chosen wisely to speak more frankly about the state of the economy. Until now Yashwant Sinha has been stubbornly upbeat and the RBI cautiously optimistic. However, the bad news has not gone away. Sinha has been compelled to admit that the fiscal deficit ceiling of 5.6 per cent will be breached. The RBI agrees and adds that it is seriously concerned about other aspects of the macroeconomic picture as well. The figures on the trade deficit, money supply and government borrowings all point to deepening trouble. Something needs to be done. What has been done is to hit the huge community of small savers by large cuts in interest rates (amounting to a 7.5 drop in earnings in some cases) on post office and other small saving schemes.

Governments generally prefer not to make too many rate changes in schemes which absorb the bulk of savings of ordinary households across the country and especially in small towns and rural areas wherefinancial services are poor. Consequently, rises and falls in interest rates tend to lag behind those in the banking system. The provocation for interest rate cuts across the board at the present time is the huge surge in small savings — about Rs 12,000 crore more than anticipated in the budget — which has worsened the fiscal deficit position. The government is certainly right to try and cut its losses. But the argument that small savings rates should be brought in line with prevailing market rates ignores the variety of public needs which small savings schemes serve. Marginally higher interest rates have made small savings schemes appear more attractive than other instruments. But this is deceptive because the average lock-in period of five to six years is higher than what prevails for comparable rates in, for example, the bond market.

The reasons why millions of ordinary people skip the bond market and go for small savings schemes are safety, easy access to a post office, the relative simplicity ofprocedures and the small amounts required for term deposits or monthly income or recurring deposit schemes. For the dhobi in Wadgaon or the vegetable-seller in Ahwa the rate cuts will be a hard blow. The recent flight to small savings is essentially a flight to safety by the white collar class. Retail investors, who burned their fingers in the stock market, were unrewarded by mutual funds and more recently shaken by tremors in the UTI, are also going to be hit by the squeeze on returns here. For larger investors who also sought refuge in the post office there is still the option of investing in gold. No doubt the government will meet the demands of this last segment of investors and try simultaneously to save foreign exchange by introducing gold bonds. But what of that vegetable-seller and the housewife who pinch and save Rs 100 a month to put into a post office recurring deposit account? It hardly seems fair that they should have to bear the burden of macroeconomic correction measures when what couldbe done elsewhere is neglected, for instance, cutting subsidies which benefit the middle classes.