Cut in small saving rates would mean robbing Peter to pay Paul

India’s # gross  domestic saving has declined from 33.9 per cent of the # GDP in  2011-12 to 30.6 per cent in 2013-14, as per the latest data of the Finance Ministry on its web site. It would have come down further in subsequent years.

So, the# savings have been coming down, for sure. Contrary to an impression widely generated, it is not the bank  #lending which is a primary source of it. #Investment , but the national savings which fund the investment.

But look at the narratives: Small savings rate must come down so that #banks are enabled to reduce their #deposit rates for ultimately helping the borrowers at the cost of depositors, who do  not have as strong a lobby as those in the EMI group. That is why, whenever, there is a change in the interest rates, the  # headlines  would scream    - whether EMI on auto or home loans would be affected or not.  

This time around, as he cut the policy rate by 50 basis points on September 29,  # RBI Governor #Raghuram Rajan said  he would work with the government to reduce the interest rates on #small savings on#  National Saving Certificates, #  PPF  and other post office schemes . The government, which in turn, had been nudging the RBI to cut the rates, felt obliged to reciprocate and Economic Affairs Secretary #Shaktikanta Das promised to get the issue examined….His boss, #FM Arun Jaitely too wants it that way.

So, the banks, government and the RBI all want the small saving rates to come down without bothering whether the main source of investment –savings would decline or not. They feel , there is a fit case for transfer of resources from one section of the society, there are tens of  crores of Indians who are small savers so that the industry and infrastructure could be financed at cheap rates , to the other who are consumers of passenger cars, high end mobile phones , investors in housing etc…..The government feels that way economic activity could be revived.

The small saving rate is about 8.5 per cent almost equal to the #FDs in the banks. The justification for cutting the rate would be that the #CPI inflation has come down and would further be brought down far exceeding the RBI targets of six per cent for January , by a few basis points.

But at the same time, Governor Rajan expressed concern over rising prices of health and education, the two important expenditure heads for the middle class, the back bone of the savings basket.

What government wants to do is to # Rob Peter (small savers) to pay Paul( high end consumers and industrialists)…..Will it work?