Indian families’ Financial surpluses are kept in small savings schemes Banks and post offices got a significant boost this quarter, with the government raising returns on most such schemes by 0.1 to 0.7 per cent. This marked the third consecutive hike in rates to be reset every quarter. However, the breadth of the schemes covered was wider than on the previous two occasions. For October 2022 to December 2022, an increase of 0.1 to 0.3 per cent was announced on only five out of a dozen small savings schemes. The first quarter of 2023 saw increases of 0.2 to 1.1 percentage points on eight plans. This increase comes after a prolonged stagnation in rates since April 2020. Since the central bank began raising rates last year and government bond yields (to which small savings rates are linked) tightened, there was a wide gap between prevailing rates and fixed rates. By the formula recommended by the Shyamala Gopinath Panel which was officially adopted in 2016. The difference was 44 to 77 basis points (bps) (one basis point is equal to 0.01%) after the small increase in October.
Now, on six schemes this difference is nil or marginal, but for five schemes it is still 5 bps to 82 bps. These include the Public Provident Fund (PPF), whose rates are now stable at 7.1% for three years and according to the formula should have fetched 7.72% last October and 7.76% for this quarter. Government mandarins have indicated that they are not inclined to hike the PPF rate as its returns are tax-free, unlike the case with other schemes. If so, it should publicly restate its policy position. Nevertheless, the returns on Sukanya Samriddhi Account scheme, which is also tax-free, was increased to 8% in the quarter. The only apparent difference with the original PPF of the 1960s is that it was introduced by the current government to encourage savings for the girl child. The general provident fund rate for government employees has also been retained at 7.1%, but their dearness allowance has been increased and their benefits under the new pension scheme are being reviewed. While PPF savings are capped at Rs 1.5 lakh annually, this budget has increased the limit for some small savings schemes manifold. It is perhaps no coincidence that the last time small savings rates were hiked across the board was in January 2019, before the Lok Sabha battle. Several states go to the polls this year and the general election due in 2024 may have influenced the latest surge in the form of the feel-good device. A uniform and transparent policy approach, rather than a five-year relief for small savers, will inspire more confidence.