Targeting the Middle Class

The Government's decision to reduce the rates of interest on various small savings schemes has quite naturally raised some storm. The official explanation is the necessity to maintain parity with market rates of interest, particularly that on the government bonds. Now the question is who gains and who loses in consequence of these cuts. The annual rate of interest on personal provident fund is going down from 8.7% to 8.1%. Those on Kishan Vikas Patras and National Savings Certificates will drop from 8.7% to 7.8% and from 8.5% to 8.1% respectively. Likewise, the rates of interest on Monthly Income Schemes, the Sukanya Samriddhi Scheme, the Senior Citizen Scheme, and the term deposits are going to be reduced substantially.

One point needs to be emphasised. Those who deposit their money in these schemes are not in general wealthy persons by Indian standards. They are not managers or directors of corporate houses. They do not live in skyscrapers or undertake frequent pleasure trips abroad.  Millions of persons belonging to the middle and lower income strata rely on the interests earned from these deposits for meeting their day to day expenses. This is particularly true of retired employees of the organised as well as the unorganised sector, particularly those who do not have substantial pension benefits. A person who gets Rs 5000 per month from his MIS deposit will have his monthly income reduced by more than 350 rupees. This is not an insignificant reduction as far as the lower income groups are concerned. Similar reductions in income will affect the standard of living (capability) of depositors in other schemes also. Of course, there is the usual argument of reduction of the burden of subsidies. The government's excuse in this regard is, however, hardly credible. Right now, the amount of unrealised loans given by the public sector banks stands at nearly Rs 2 trillions, and most of this colossal amount has been appropriated by the corporate sector. The case of Vijay Mallya is an example. By displaying an extreme callousness in recovering these loans, occasional boastful promises notwithsatnding, successive governments at the centre have made it clear that they are not against subsidies, only if these subsidies help the corporate tycoons.

The very banking system in India facilitates corruption with its devastating human cost. No doubt corruption today is 'public enemy number one' throughout the developing world while in India it looks beyond control. The largely hidden truth is that banks play an integral role in enabling the huge catastrophic corruption. Large scale corruption involving briefcases full of money is confined to the past. Corrupt officials and politicians now tend to rely on banks to hide the money they plunder and then make it appear "clean".

At the end September 2015, the net Non-Performing Assets (NPAs) of state owned banks in India i.e., gross NPAs less provisions, stands at Rs 1.74 lac crore, which is equal to almost a third of their total net worth. If banks provided for all their bad debts, it would wipe out 33% of their paid-up capital, plus reserve and surplus. As per Reserve Bank of India disclosures, 29 public sector banks wrote off a combined Rs 1.14 lac crore of bad debt, between 2013 and 2015. The write off is higher than one-third of the total gross non-performing assets of Rs 3.06 crore for public sector banks. Provisions represent the money set aside by government bonds, in the event of default or non-payment. For 16 out of 25 public sector banks, the ratio of non-payment to amount of loans is more than 33%. Average for private sector banks is 4.9%. Loan write-offs by banks in India, reached a level of Rs 50,000 crore for public sector banks in 2014-15. Another Rs 25000 crore were written off between April 2015 to September 2015. Small loans are rarely written-off, most of them are big loans. Some banks write-off accounts to sell them to Asset Reconstruction Companies (ARCs) at lower prices, and make easy money out of it. An indicator of a bank's ability to cover future loan losses is the Provisioning Coverage Ratio (PCR). The PCR is the Ratio of Provisioning to gross Non-Performing Assets (NPAs). For 20 public sector banks, this has declined from 72 percent (March 2011) to 57 percent (March 2015).

The phenomenal rise in the number of billionaires (in terms of dollars) is the outcome of a subsidy regime, which plays its game in a somewhat subtle fashion. Subsidies to the corporate sector in the form of successive tax concessions and reformed labour laws often goes unnoticed, because they are thought to be essential for stimulating the economy towards higher economic growth. Economic and political phenomena are interrelated, however. A government that encourages the displacement of adivasis from their traditional means of livelihood with the purpose of handing over their lands and forests to the corporate sector must, according to its own logic of governance, place greater burdens on the depositors in small saving schemes, and the standard argument is stimulating economic growth, which, given the record of the past two decades, means fattening the corporate houses. Here the burden of growth is to be borne by small savers.

Is the announced reduction of interest rates designed to prod depositors in small saving schemes to keep their money in shares? Maybe, because small savings schemes will henceforth be less attractive, and depositors may turn to the share market. But the vicissitudes of the latter may well prove their undoing sooner or later. Assessment of the performance of the economy by the ups and downs of the share market is a misleading one, because it discounts the conditions of the broad masses of the people.

Strangely enough, RSS affiliate Bharatiya Mazdoor Sangh opposed the reduction in interest rates on small savings while urging the government to make a paradigm shift in the country's economic model as "market-driven economic policies were not suitable for India".

But Modi and his corporate advisers do hardly care.

Vol. 48, No. 39, Apr 3 - 9, 2016