The report card of the Indian government headed by Prime Minister Manmohan Singh is likely to read 5/100 for taking care of public savings. The five marks are only for recognising, albeit late, the importance of managing public finances well.
The government plays a large role in managing the savings of every household in India and if it does not manage those savings properly the public lose their trust in the government. The government should improve its marks on taking care of its savers’ interest. PM’s New Year resolution for 2013 should be to achieve at least 80 percent marks on managing public finances well.
Every household in India has investments that are directly or indirectly exposed to the government. Direct exposure includes investments in public provident fund (PPF), small savings schemes such as post office savings schemes and national savings certificate, government bonds and senior citizens savings schemes.
Indirect exposure to the government includes investments in bank deposits (banks invest 23 percent of deposits in government bonds), LIC and other insurance policies (insurance companies have to invest a minimum of 25 percent in government bonds), bonds of public sector companies and fixed deposits in public sector companies and government guaranteed bonds.
Many households in India predominantly invest in government-run savings schemes and in government companies as they have faith in the government to protect their capital. It is fair to say that government policies affect the savings of almost every individual in the country (except the crony capitalists who stash the money away in black as they do not believe in government safeguarding their investments).
Has the government delivered on its promise to take care of people’s savings? The overwhelming answer is no. The first protection that the government gives its savers is that it will take care of inflation. Inflation at the wholesale level and consumer levels has been running at highs over the last three years.
Inflation as measured by the wholesale price index (WPI) averaged over 9 percent in the 2010-2011 period before falling to levels of 7.5 percent in 2012, which is still at higher levels compared with inflation levels of less than 5 percent seen in the early 2000s.
Consumer price inflation (CPI) has consistently been hovering over 9 percent levels over the last two years. Inflation eats away savings and the government has been unable to bring down inflation expectations in the economy. Zero marks on inflation for the government.
The government has been unable to manage its finances properly with fiscal deficit as a percentage of GDP going to levels of 5.9 percent in 2011-12 from levels of 4.9 percent seen in 2010-11 and levels of 2.8 percent seen in 2007-08.
The government is struggling to meet its fiscal deficit target of 5.3 percent of GDP (revised from5.1 percent) for 2012-13. Rising fiscal deficit pulls up inflation, pulls up government bond yields leading to capital loss (notional) for banks and insurance companies and pulls down value of investments of the savers who have direct or indirect exposure to government bonds and bonds of public sector companies. Zero marks on fiscal deficit.
The recognition of the inflation and fiscal deficit problems has been forced on the government due to the fall in the rupee that has lost over 20 percent against the dollar in the last one and half years.
The falling currency adds to inflation and adds to fiscal deficit through increasing subsidy bill. However, the fact that the government has recognised the need for fiscal consolidation deserves five marks on hundred.
Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors.