The government is rethinking its banking outreach programme. A committee headed by a Reserve Bank of India deputy governor has recommended that administered interest rates in post office savings schemes be linked to treasury yields. This will accomplish three objectives. First, it removes a floor on interest rates, thus aiding the central bank’s mission to make monetary transmission more responsive. Second, it eases the burden on a government committed to subsidising the small saver for shifting her savings into financial instruments from the traditional, yet unproductive, assets like land and gold. Third, state governments, which have a lien on these savings, end up paying for more for their borrowings because the interest rates are artificially propped up. As a byproduct, the proposals aim to also close a money-laundering avenue that post office savings have come to represent.
Valid arguments all. Yet, they miss the big picture: markets discriminate against the small. The poor get a lower return than the rich on their savings—if their savings are worth a bank’s while to collect, that is. Which is why post offices were made to double up as banks in the first place: they happened to be in the neck of the woods that banks had never visited and were made
to accept deposits that regular banks would consider small change. Four decades after banks were nationalised they have not been able to penetrate the countryside enough to make the post office savings deposit redundant and India remains a grossly underbanked country. Although technology today allows universal banking through devices like cellphones, this is still being tested in India. The government will have to think long and hard before it tweaks the retail loans for which it offers a sovereign guarantee or the interest it offers on them. Pegging rates on treasury yields runs the risk of lowering them in a low interest environment, chipping some sheen off post office savings instruments.
Post office savings have an even more powerful argument going for them than the welfare one. India’s growth is predicated on its savings rate. We save over a third of our income, but this number does not mean much unless most of the household savings enters the financial market where it gets farmed out for investment into factories, highways and ports. In a decade from 1969, when banks were first nationalised and told to go to the villages, the Hindu rate of growth crept up from 3.5% to 5%. Since then, as bank branches fanned out across the country, our growth rate has sprinted to 9% as more Indians put their savings in banks. The logic of sweetening the decision to park money in a post office still holds. Indians’ historical affinity for saving in gold and land is phenomenal; the State must wean them off it.