The government withdrew the new small savings rates which were declared a few days ago. The Government had initially cut the rate from 4% to 3.5% for the first quarter of 2021-2022 but later they withdrew the order.
On 31st March, the Government cut interest rates on various Small Savings Schemes sharply. The revised rates had to come into action from April 1st and had to remain in effect till June 30th. The Government then withdrew this order on April 1st and announced to continue with the previous rates from the last quarter of 2020-2021.
What is the Small Savings Scheme?
The Small Savings Scheme is governed by the Central Government. It is an important source of household savings and also a major contributor to India’s financial savings scenario. Household savings are important for capital formation in the economy. They also play an important role in the total savings in the economy. It consists of private savings and exports which contributes to the growth of the economy and gives a boost to the nation’s development. It is the large-scale participation of the general public and the government brings these schemes at a higher interest rate.
Different Small Savings Schemes have mobilized money from households and channelize it to the Government so that the center and state can finance a part of their expenditure. The central government operates Small Savings Schemes through a nationwide network of about 1.5 lakh post offices, more than 8000 public sector banks, and more than 5 lakh small saving agents.
Small Savings Schemes is divided into 3 heads:
1. Postal deposits: Deposits that one maintains with Post Offices in the country. It consists of the:
- Savings account
- Recurring account: Every month or year, the amount will be recurring or repeating. A particular amount has to be paid after a certain time period.
- Time deposits: Amount that is deposited for a particular period of time.
- Monthly Income Scheme: In these one can invest a certain amount and earn a fixed interest every month.
2. Savings certificate: This is particularly to help individuals save money. It consists of the:
- National Savings Certificate: It is a savings instrument that offers benefits of investing and also there’s an advantage of tax deduction.
- Kisan Vikas Patra: This doesn’t offer a tax deduction.
3. Social security schemes: As the name suggests, it gives social security to a particular group of people or households. It consists of:
- Public Provident Fund (PPF)
- Senior Citizens Savings Scheme
- Sukanya Samriddhi Yojana
The public account of India consists of the Consolidated Fund of India (CFI), Contingency Fund of India, and Public Account. Because of the nature of the fund, the money under public account doesn’t need parliament approval but if the money is withdrawn from the CFI, it will need a vote of the parliament.
National Small Savings Fund
The National Small Savings Fund (NSSF) comes under the Public account. In this, the Government is the banker or the custodian. It will hold the money but it is not the money of the Government. It is to be returned back to the public. NSSF was established on 1st April 1999. All the savings collection, i.e, the money from the Small Savings Scheme will go to the Public Account through the NSSF. All money from Small Savings is credited to NSSF and withdrawals under the Small Savings are also done from the NSSF. The balance amount is invested in central and state government securities. The NSSF is administered by the Department of Economic Affairs under the Ministry of Finance Government of India.
In 2018, Government Savings Promotion Act was proposed by the Union Cabinet. It is beneficial to the Girl child, senior citizens, etc. It made Small Savings easy, transparent, and accessible for investors. It merged the Public Provident Fund Act of 1968, the Government Savings Bank Act of 1873, and the Government Savings Certificate Act of 1959. Benefits for depositors:
● A PPF account cannot be closed before 5 years but in the Government Savings Promotion Act, premature closure is allowed. In case of emergencies like medical issues, a PPF can be closed earlier.
● Guardians can make investments on behalf of minors but under the Government Savings Promotion Act, guardians can also be nominees of minors. If something happens to the minor, the guardian will get the monetary benefit.
Drawback: No clear provisions or rules and regulations regarding the deposits by the minor were given. Also, the guardian was not given any rights and responsibilities.
● The mechanism for redressal of grievance and quick settling of disputes relating to Small Savings.
In 2020, there were steep rate cuts in Small Savings Schemes. The interest became much lower. The COVID-19 situation has impacted millions of livelihoods in India, forcing the Government and Central Bank to take drastic measures to provide relief. Following the Reserve Bank of India’s slashing of the repo rate, the Government announced sharp interest rate cuts for the Small Savings Scheme for the first quarter (April-June) of 2020-2021. The rate is decided by the Central Government in every quarter.
Read More:- Budget Highlights 2021 – Income Tax Slab Rates
Why The Steep Rate Cuts?
● The rate cuts were due for a long time.
● Since 2016, the rates on these schemes are aligned with those on Government Securities (G- Secs). As the G- Sec rates move up and down, the rate on Small Savings Schemes should also vary every quarter.
● Over the years, the 10-year G-Sec yield is very less but on most Small Savings Schemes, the rates had not changed much. Hence, the rate cut was overdue.
Around Rs.12 lakh crores are deposited in Small Savings Schemes and it is mostly done by senior citizens, girl children, and fixed income investors. They are usually the major beneficiaries of the scheme but due to the rate cut, they get a lower interest rate than before. The senior citizens were already among the worst hit by the falling rates as Bank Fixed Deposits rates had crashed, leaving them with a lower interest income.
People had to reconsider their whole investment plan as they would get lower returns because of the rate cut in 2020 and even lower if the rate cut was implemented this year too.
Should one invest in Small Savings Schemes despite the rate cut?
- The safety factor is always going to be high as it is guaranteed by the Government.
- Compared to most bank deposits, rates on some Small Savings Schemes remained higher despite the cut.
Government plans to borrow Rs. 12.05 lakh crores in 2021-2022. In 2020-2021, Rs. 13.71 lakh crores were borrowed.