Finally, after threatening to do so for months, the government has reduced small savings interest rates. The logic is that interest rates and inflation in the economy are lower, and small savings rates have been brought down to keep them in sync with them.
From now on, small savings rates will be kept in line by re-aligning them quarterly. A couple of months back, when talk of this change first surfaced, I’d written that the government should be circumspect about coming down too heavily on some of these schemes, specially the Senior Citizens Savings Scheme (SCSS). That hasn’t really happened.
In fact, there’s a mathematical sleight of hand in the way the rates have been announced and have been carried in the media.
Everywhere, you will read that PPF rates are down by 0.6 percentage points, SCSS by 0.7 percentage points, NSC by 0.4 percentage points and so on. This is correct and yet misleading because it hides the huge impact on the earnings of depositors in these schemes. The earnings on an SCSS deposit are actually down by 7.5 percentage points.
An old person with the maximum allowed Rs 15 lakh SCSS deposit was earlier earning Rs 11,625 a month and will now earn Rs 10,750 a month. That’s a big hit. Lower inflation and interest rates and (presumably) higher economic growth are all very well but will carry no benefit for SCSS depositors because they are no longer in the earning and accumulative phase of their lives. In any case, the real inflation in their lives is much higher than the official CPI inflation rate.
SCSS is a small scheme and is yet important for those who use it. The government will save a mere Rs 150 crore of annual interest outgo, which is negligible at its scale and yet the impact will be substantial on those who use this scheme.