The Reserve Bank of India’s obsession with cheap money policy is deepening the wrinkles on the foreheads of senior citizens who primarily depend on interest income to sustain themselves. With every cut in the policy rate, the hole in their pocket is getting bigger.
Once the country’s central bank lowers the benchmark repo rate -- the rate at which the RBI lends money to bankers to provide liquidity -- commercial banks are obligated to reduce their lending rates. Obviously, if banks cut lending rates they have to lower their deposit rates too to protect their business interest. And this is where interest earners are getting stumped -- their income shrinks with every cut in deposit rates.
On October 4, the RBI cut the repo rate by 25 basis points to 5.15 per cent -- the central bank has cut the policy-signalling rate this year by a cumulative 135 basis points. Within a week, on October 9, the State Bank of India (SBI) -- the country’s largest bank -- cut both its deposit and lending rates. While the bank had cut the fixed deposit (FD) rate in the 1-2 year maturity bracket for senior citizens to 6.9 per cent from 7 per cent, it had also trimmed the savings bank rate to 3.25 per cent from 3.5 per cent. Other banks will soon follow suit in cutting their deposit and lending rates.
In the absence of a viable social security scheme in the country, such a scenario isn't music to the ears of senior citizens and retirees who are dependent on FD income to meet their financial needs. What is more worrying is the fact that the situation is unlikely to change anytime soon. Unlike Raghuram Rajan and Urjit Patel, the two previous Mint Road bosses who had inflation-targeting as their main agenda, Shaktikanta Das -- the present RBI governor -- is fixated on growth and has made it clear that the accommodative stance of monetary policy will continue until growth picks up.
It is entirely a different debate whether just by lowering the policy rate, the growth engine of the country can be powered up. In this context, it is hard to resist the temptation of playing devil’s advocate and pointing out that the RBI had been lowering the growth projection for 2019-20 almost in tandem with the policy rate cuts this year. Clearly something is amiss.
While experts in North Block and Mint Road can split hairs on the causal relationship between higher growth and lower interest rate, an elected government of a democratic country like India needs to worry about the plight of its senior citizens.
According to a recent report of SBI Ecowrap, there are around 41 million senior citizens' term deposits accounts in the country with total deposits of Rs 14 lakh crore, which is equivalent to 7 per cent of the country’s gross domestic product (GDP). The average deposit size per account is around Rs 3.3 lakh and interest income from such deposits formed 5.5 per cent of the private final consumption expenditure (PFCE is a component of GDP) in 2018-19. Given the declining interest rate scenario, the SBI report feels this may go down and impact the PFCE. Simply put, with every rate cut senior citizens will have less money to spend on consumption, whether essential or discretionary.
So is there a way to offer some respite to senior citizens and retirees? Personal finance experts will seize this opportunity to showcase the merits of debt mutual funds for a modest but relatively steady return on investments. But remember the disclaimer: “Mutual fund investments are subject to market risks, read all scheme related documents carefully…” Senior citizens dependent solely on their meagre interest income can hardly be expected to have any appetite for risk and for them, mutual funds are not the best choice.
For an assured income, the government can cite the Senior Citizens Savings Scheme (SCSS), under which a senior citizen can deposit Rs 15 lakh and, at present, earn an interest of 8.6 per cent. Then there is the Pradhan Mantri Vaya Vandana Yojana, operated by the Life Insurance Corporation of India, which offers senior citizens a guaranteed payout of pension at a specified rate for 10 years. The investment ceiling in this scheme is also Rs 15 lakh and it does not offer any tax benefit. While there are small savings schemes, including the Public Provident Fund, that offer interest rates higher than bank FD rates, in most of the cases the scope for interest income is circumscribed by the cap on investments in such deposits.
With deposit rates falling and the median inflation expectation of households -- an outcome of a clutch of independent surveys carried out by the RBI -- hardening to 8 per cent in September from 7.6 per cent in July (way above the RBI’s own forecast of 3.5-3.7 per cent for the second half of the current financial year), there is an urgent need to review the investment limits for SCSS and some of the small savings schemes. A higher cap would allow senior citizens to park more money in these schemes that offer better return than bank FDs.
There are two arguments often made whenever the question of senior citizens being hurt by lower interest rates crops up. The first one is that inflation has come down. But inflation coming down doesn't mean that prices have fallen and the real incomes of senior citizens go down with every rise in prices. The second argument is that senior citizens benefit from special higher interest rates for them. That is true, but even their rates of interest have been revised down substantially.
There is therefore room for looking at the tax levied on interest earned on deposits for senior citizens, including the SCSS. According to the SBI Ecowrap report, interest outstanding under the SCSS, as of March 2018, was Rs 38,662 crore. It had argued that if such amount was given full tax rebate the revenue foregone by the government would be only Rs 3092 crore, having a minimal impact of 2 basis points on the fiscal deficit.
This argument has merit. In fact, if the government can be magnanimous enough to slash the corporate tax rate to 22 per cent from 30 per cent for existing companies, and to 15 per cent from 25 per cent for new manufacturing companies, it can well afford to be generous enough to take the interest income of senior citizens and retirees out of the tax net.
With a new direct tax code still in the works, the NDA government has ample scope to help seniors lead a life of dignity.
Abhijit Kumar Dutta is a freelance writer. Views are personal.
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