Low rates invitation to loot; falling savings a concern say RBI, IMF; Macro-economic imbalances are at a high


Savings is being disincentivised and loot of public money is being condoned and incentivised. Lower interest rates on deposits are direct invitation to the loot by the biggest. Indian banks are following the western pattern of robbing the poor to pay the rich. It is bad economics and unfortunately the Economic Survey advocates it – a prescription to the ruination.
The decision to cut interest rates on PPF, national savings certificates and kisan vikas patra is politically harmful for the ruling combine and economically it is to set a pattern of downward rolling. These instruments have been funding government coffers to carry out development. It hits the largest section of the lower middle class, who are supposed to be the engine of growth. Ironically, they are also supporters that the replaced the political structure in 2014. They believed in the slogans of low taxes and believed the political masters would be protecting their interests.
A RBI report says, “The gross domestic savings rate as per central statistics office’s (CSO) estimates declined to 30.1 per cent in FY13 from 31.3 per cent in FY12, and a peak of 38.1 percent in 2008, mainly on account of a decline in the rate of household physical savings. The savings rate dipped to the lowest in the past nine years and has accentuated the macroeconomic imbalances. The household savings rate generally hovered around 23 per cent since 2004”.
IMF’s World Economic Outlook forecasts a slowly rising GDP growth rate for India till 2020, from 7.3 percent to 7.7 percent, but it says both savings and investment rates, as a percentage of GDP, will be even lower than in 2014. The investment rate, for instance, was 31.6 percent of GDP in 2014 and it will fall to 30.59 percent in 2017, and then huff and puff its way up to 31.1 percent of GDP by 2020.
India needs to listen to the warning. India must not follow the western method of banking. Western low lending rates has led the world to the severe economic crisis of 2007-08 marked by the Lehman-AIG and the entire financial sector crash. India needs to desist from it.
The government economists are suggesting taxing all savings ignoring the IMF warning. They have specious plea that disincentivising savings would lead to consumption. It does not happen. People in countries like India are deeply steeped in traditional values. The west incentivizes a debt-led growth. Traditionally, Indians do the opposite. They save and buy, making them less dependent on debt. It has been the greatest strength on its economy. The savings had fueled the economy. The high savings rate had been responsible for funding large part of the development process since Independence.
“Income tax is inherently biased against savings; it leads to double taxation in so far both the savings and earnings are taxed”, surprisingly the Economic Survey itself says. It further extols the virtues of EEE – exemption of savings from taxes at all levels. It is a bit shocking that this people-centric government allows itself to be misguided by the concept of EET – tax all savings even it is for the purpose of social security as the National Pension Scheme is. It is also a myth, the Survey propounds, “small savers are largely outside the tax net”.
The tax rates are the highest in this country. Anybody, even a beggar, pays a minimum 40 percent, indirect taxes to the centre and the states. The plethora of taxes up to the municipal level are not included in the Survey calculations. The GST, if enacted, would add a minimum of another 6 percent to these taxes.
Does it justify having a high direct income tax and force people to undergo several kinds of levies? Policy makers need to review the entire tax structure and deposit interest regime to take the country to fast growth.
Since the presentation of 1992 budget by Manmohan Sngh, an illusion was created that the stock market is the ultimate answer to savings. It proved wrong in days with the busting of the Harshad Mehta scam, apparently supported by some large corporate. The route then also was simple – surreptitiously divert bank funds.
The 25 years of Manmohanomics did little to protect the banks that thrive on poor man’s savings. Pretensions of linking deposit rates to inflation – largely when it is on the lower side – were only to keep interest rates low to help those who could swindle it.
The Harshad Mehta crash that cost Rs 93 to 98000 crore to the banks was followed by fodder scam, JMM bribery, several other scams like mining, cosl, Bellary iron ore, telecom 2G spectrum, UTI, LIC, Mercantile Bank, Indian Bank, hush-hushed Indian Overseas Bank, Augusta Westland copter, Commonwealth games, Taj Heritage Corridor and Satyam scam. It is an endless list that leaves no sector.
By trying to force lending rates low, the country is only trying to reward those who hit the soft funding belly. This is what NN Vohra committee in 1993 had said commenting on the “activities of crime syndicates/mafia organizations which had developed links with and were being protected by government official and politicians”.
The modus operandi is simple. Get a large loan, default on payment, negotiate for waiving of interest payments, again default and vanish. The poor man loses, not only his principal, his interest accruals – it is not his income, pays higher bank charges and ultimate dream of a better life.
It is a worrying trend. It shakes people’s confidence. This government should take steps to reverse the process. It has to protect the banking sector. These cannot be “re-capitilised” endlessly with taxpayers’ money. The government has to ensure that lending rates are set at a high, so that the unscrupulous and particularly those having large reserves are prevented from taking advantage of the cheap money. It has to be backed by a corresponding deposit rates at a minimum of at least 9 percent and freed of multiple taxation.
The move would be a deterrent. Corporate should be forced to take the bond and equity route for funding. If the banks are not protected and household savings encouraged, the country may move to an abyss that IMF indicates. Macro-economic imbalances are at a high and need to be corrected.

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