 "Small savers could earn more from PPF, PO schemes")
Last Tuesday, a review committee under Shyamala Gopinath, Deputy Governor at the Reserve Bank of India, presented a report to Finance Minister Pranab Mukherjee. If the government accepts these recommendations, small savers would have a reason to rejoice.
[caption id=“attachment_23109” align=“alignleft” width=“380” caption=“Little money, big savings. Reuters”]
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Small savings matter to the ‘aam aadmi’, the mascot of this United Progressive Alliance government. For the year ended March 2011, the small savings outstandings with the government in popular schemes like public provident fund, monthly income scheme of the post office and Kisan Vikas Patra was Rs 7,93,440 crore.
The share of small savings as a percentage of net financial savings of households increased sharply from 7.9 percent in 1996-97 to 22.3 percent in 2004-05.
Thereafter, the share declined and even turned negative during 2007-08 and 2008-09 as alternative savings instruments became relatively more attractive. The share was only marginally positive during 2009-10 and is expected to increase modestly in 2010-11.
Here are some key recommendations from the report:
• Interest rates on post office savings bank deposits to increase to 4% against 3.5% now.
• Kisan Vikas Patras to be withdrawn.
• Annual investment limit in public provident fund to be raised to Rs 1,00,000 from Rs 70,000 currently.
• Interest rate for one-year deposit scheme to go up to 6.8% (from 6.25%).
• Returns for the PPF to improve to 8.2% (8% currently).
The government is making an effort to provide market-linked returns to investors. Currently, returns on these schemes are backed by a sovereign guarantee. They do not change quickly with changes in interest rates in the market. The government has to pay a higher return even if interest rates are low. This creates asset-liability mismatches in the fund.
The effort of the committee is to make government saving schemes attractive but ensure that they are closer to market-based returns. The committee is also suggesting a cap on movement in returns in a single year to ensure that there is no volatility. For example, over the past one year, the RBI hiked interest rates by 3.5%. Interest rates offered on small savings cannot vary that briskly. So if average interest rates rise by 3.5% in a year, small savings rate would go up only by 1%. The same method would be followed in a downward interest rate scenario.