Yet Another Slap on Common Man’s Face…..

Narendra Modi and his team of ministerial lieutenants’ love to burden the common man continue unabated. And the latest in this direction being the move to slash interest rate payable on small savings including the provident fund – apparently to bring the rates close to market rates. This market oriented move (In all its true meaning) to trim the assured returns of crores of working Indians will result in the 90 basis point lower earning in the April-June quarter. And in all likely hood, the rates may be further cut or remain at the same for the entire fiscal, if one makes a reading from the government’s actions over the last 22 months.

In case of PPF, the most popular scheme for middle-class savers, the reduction of 60 basis points (100 basis points equal a percentage point) is among the sharpest in nearly 15 years.

Image Courtesy: flickr.com

In normal parlance, that due to this reduction someone with Rs 5 lakh in his PPF account would face a hit of Rs 3,000 per year for as long as this reduction continues.

What are the options now one has to put this money in? With lower interest rates, typically, the propensity to save would come down or redirect the excess funds to alternate investment options like stocks / commodities, putting their savings at risk . This reduction in interest rates in small savings will hit the poor and the middle class badly as bulk of their savings are in small deposits. The provident fund, with a corpus of over Rs. 5 lakh crore remains a more attractive options for the salaried, especially with tax benefits thrown in. A reduction of the interest rate is therefore directly attacking these savings and equivalent to a tax on such savings.

According to the government, the interest rates for various small savings schemes were recalculated with its earning from government securities with the equivalent maturity for the period December 2015-February 2016.

What is even more surprising, however, is the government’s decision to cut interest rates on savings schemes with a social objective such as Sukanya Samriddhi account (SSA), Senior Citizens Savings Scheme and Monthly Income Scheme. (Refer to the chart for the entire revised rates for various schemes.)

According to the government, the quarterly revision of interest rates will ensure that the interest rates under small savings schemes are more dynamically related to current market rates, thereby enabling the banks to move their interest rates in line with current money market rates. The total corpus of all small savings scheme minus PF was around Rs.300,000 crore as on the last fiscal and the accretion this year was around Rs.65,000 crore till January 31. The SSA has around 85 lakh accounts with a deposit of around Rs.3,500 crore, while the KVP corpus is over Rs.21,000 crore.

Communist Party of India-Marxist (CPI-M) general secretary Sitaram Yechury points out in his tweet, "Small savers are the backbone of our savings. With no social security net, they rely on such guaranteed returns."

From the outset it looks like that the government is all se to finish off the EPF and other social security schemes.

In the Budget proposals last year, government had declared that workers are ‘hostages’ and not ‘clientele’ to the EPF and ESI Schemes. Finance Minister had proposed that the PF Subscribers be given an option to switch over to NPS and ESI subscribers be given an option to switch over to medical insurance policies.

When this question was raised in the meeting of Central Board of Trustees of EPF, the Labour Minister had no answer on the necessity of these proposals, which are not beneficial to the workers. These proposals, along with a proposal to ‘appropriate’ Rs. 6000 crores from EPF for a Social Security Fund for Senior Citizens could not be implemented because of the stiff resistance from workers.

It is apparent that there is a clear co-relation between the government’s earlier move to EPF to NPS and now slashing rate on small savings is just make funds going to these schemes available to the market. The government changed the investment rules of EPF providing to invest 5 to 15 per cent of EPF corpus in the share market. And so that is it. Either you invest your life long savings in the market or get taxed in different ways. This is the message of the Modi government and his Finance Minister.

Disclaiaimer: The views expressed here are the author's personal views, and do not necessarily represent the views of Newsclick