The Indian government’s move to cut interest rates on small saving schemes and the quick withdrawal of that particular order has kicked up a political controversy.
The government early Thursday withdrew the order on new rates, issued barely twelve hours earlier, calling it an “oversight.” Finance Minister Nirmala Sitharaman tweeted: “Interest rates of small savings schemes of GoI shall continue to be at the rates which existed in the last quarter of 2020-2021, ie, rates that prevailed as of March 2021. Orders issued by oversight shall be withdrawn.”
The government had announced a cut in small savings rates by 50-110 basis points for the first quarter of the new financial year. In the April-June quarter of the previous fiscal year, the government had slashed rates of small savings schemes by 70-140 basis points.
With the rescinding of the new order, the interest rate on Public Provident Fund, a popular monthly savings scheme among small investors, will remain 7.1% and not 6.4% as was stated on Wednesday. Another popular scheme, National Savings Certificate, will continue to generate 6.8% interest, as against 5.9% announced. The new rates have been rolled back for all other small savings schemes as well.
The proposed rates would have hurt millions of depositors who invest in these schemes for social security and income. As they are run by the government, investors expect them to be more reliable and stable than those offered by private players. For the salaried class investing in these schemes offers income tax exemptions, while pensioners and other senior citizens rely on these schemes as a source of income.
As per the government notification, the rates will remain unchanged through June. This has given rise to speculation that rate cuts may be brought back after that period.
The opposition parties were quick to attack the government over its policy flip-flop. They alleged that the order was withdrawn to avoid antagonizing the voters in four states and a union territory where the elections are currently going on. Congress party leader Priyanka Gandhi Vadra wrote in a Twitter post that the government’s latest decision was an “election-driven hindsight.” Trinamool Congress party leader Mahua Moitra in her tweet described the interest rate roll back as an April Fool joke.
The ruling Bharatiya Janata Party has been vigorously campaigning in the ongoing state elections with Prime Minister Narendra Modi and other prominent ministers addressing numerous election rallies in these states. Interestingly, before making the announcement, the government had secured Election Commission’s no-objection for the new rates, television channel NDTV reports quoting sources.
Meanwhile, India is one of the economies worst affected by Covid-19 pandemic downturn. According to the US-based Pew Research Center, the Indian middle class has shrunk by a record 32 million and this accounts for around 60% of the global retreat in the middle-income tier (people with incomes of $10.01-$20 a day).
“Prior to the pandemic, it was anticipated that 99 million people in India would belong in the global middle class in 2020,” the article says. “A year into the pandemic, this number is estimated to be have been 66 million, cut by a third. Meanwhile, the number of poor in India is projected to have reached 134 million, more than double the 59 million expected before the recession.”
In just one year of the pandemic, the poverty rate for 2020 in India rose to 9.7% from the January 2020 forecast of 4.3%.