Until two years ago, Manoj Sah, a Noida-based executive with a research firm, would routinely save Rs.50,000 annually in a Public Provident Fund (PPF) account with his neighbourhood post office. The figure has since dropped to Rs 500, the minimum deposit required to keep the account alive.
A surge in inflation has made returns on PPF and other post office savings less attractive, driving Sah to look for other options. "I would go with mutual funds as they can generate returns higher than inflation," he said.
Even if you were to discount the double-digit inflation rate looming ahead, at 8.75 per cent the returns from seven out of eight small saving schemes are negative. Barring Senior Citizens Saving Scheme, which offers a return of 9 per cent, the real returns — the rate adjusted for inflation — from all other instruments is negative.
Sah is lucky, as he has other avenues to invest in. But for 7 million Indians who are not as privileged, the ubiquitous post office is the sole savings avenue.
According to Invest India Incomes and Savings Survey, produced by IIMS Dataworks, a market research firm focussed on retail finance, there are 7 million investors in India, who bank exclusively with post offices and have seen real returns from their deposit erode due to rising inflation. Of these, about 97 per cent (almost 6.8 million) have an annual income of Rs 1.2 lakh or less, and 78 per cent (5.5 million) belong to rural India.
The interest rate that an individual earns from various post office schemes varies between 3.5 per cent in a Post Office Savings Bank Account, and 8.41 per cent in Kisan Vikas Patra.
The worst affected are the more than 2.3 million postal pass-book account holders (earning 3.5 per cent).
For them, even if you take an average annual inflation rate of 8 per cent, the real rate of return turns into a loss of 4.5 per cent.
Is there a way out?
Maybe none for now. But going forward, policymakers will have to focus on expanding network of banks and investment avenues for people living in rural areas. “More than 60 per cent of Indian households don't have bank accounts and equity markets are accessible to only 2 per cent,” said Rajiv Kumar, director and chief executive, ICRIER. “We need financial sector liberalisation and rapid expansion of banks.”