Union Finance Minister Nirmala Sitharaman’s comments blaming ‘oversight’ for cutting interest rates on small savings schemes to an over four-decade low and then rolling back the earlier announcement could save Bharatiya Janata Party the blushes in the poll-bound states. But it would dent her credibility as an administrator and reformer.
The interest rate on Public Provident Fund was lowered from 7.1 per cent to 6.4 per cent, and that on National Savings Certificates from 6.8 per cent to 5.9 per cent for the June quarter. The Senior Citizens Savings Scheme rate was cut from 7.4 per cent to 6.5 per cent. The rate on Sukanya Samriddhi Scheme, the highest paying small savings instrument, was lowered from 7.6 per cent to 6.9 per cent. The ministry had cut interest rates on various small savings scheme sharply by 40-110 basis points.
In overturning the order re-setting interest rates on small savings schemes within about 12 hours, Sitharaman has set aside a process that was put in place five years ago, in 2016, by her predecessor, Arun Jaitley. The process followed a February 2016 order of the Budget division clearly explained the quarter reset cycle, how these are to be determined based on yields on government securities of comparable maturity, and any spread to be given over and above these rates.
Sitharaman has blamed an ‘oversight’ for the lapse. But as a former bureaucrat in the finance ministry points out, “This well-laid down process, which was put in place in 2016 after extensive consultations over the years, leaves limited scope for any ‘oversight’ to creep in while issuing the order.”
Panic in BJP camp
The rates on small savings schemes were on hold for the past three quarters, since their last revision for the April-June quarter in 2020. The file on quarterly reset of interest rates on small savings normally moves from Deputy Director to Director, Budget, then Joint Secretary or Additional Secretary Budget and Department of Economic Affairs Secretary. The rates are thus decided within the Budget division, usually with the prior knowledge of the Finance Minister and with her final go-ahead.
While the ‘Office Memorandum’ regarding revision of rates issued by the Budget Division in the Department of Economic Affairs was uploaded on the finance ministry website on Wednesday evening, Sitharaman tweeted at 7.54 am, Thursday, that the ‘orders issued by oversight shall be withdrawn’.
According to sources in the BJP, there was panic within the BJP, particularly among party’s candidates in West Bengal, Assam, Tamil Nadu and Kerala, about the political implications of lowered interest rates. Frantic phone calls went from these states to top BJP leaders in New Delhi asking that the ‘damage’ be undone.
This well-laid down process, which was put in place in 2016 after extensive consultations over the years, leaves limited scope for any ‘oversight’ to creep in while issuing the order
The maximum calls came from West Bengal, which is the highest contributor to the government’s small savings schemes, with a share of over 15 per cent in deposits at post offices and banks. The BJP is the primary challenger to the ruling Trinamool Congress (TMC) government in West Bengal. The state’s contribution to small savings schemes became one of the trigger points for the government to roll-back interest rate cuts in less than 12 hours of announcing them.
The interest rate cuts, if implemented, would have affected the middle-income class and poorer sections. These schemes require minimum investment as low as Rs1,000, which makes it possible for low-paid workers or senior citizens, to save for a rainy day. This would have not gone down well with a majority of voters, not only in West Bengal but also the three other states and a Union Territory going to the polls, namely – Tamil Nadu, Kerala, Assam and Puducherry. The local BJP leaders did not want to anger the voters by eating into their retirement money or funds set aside for the girl child’s education.
Risk-averse folks and retired government servants prefer these savings instruments because they give relatively higher return compared to banks and other instruments. A relatively higher proportion of those who don’t want to put their money in all mutual funds and stocks invest in these instruments.
Meanwhile, the roll-back drew more than its share of sarcastic comments. The best comment came from former finance minister Yashwant Sinha: “I am sad today. I thought I alone had the monopoly of roll-backs. This government has outdone even me. Labour laws, small savings interest rates are a couple of examples. Roll Back Modi.”