Thinkpad: Roll Back And Roll On...
From the government’s decision on small savings to the RBI’s on auto debit rules, it was roll-back week.
Happy Sunday.
Decisions rolled back. Deadlines Deferred. Some enforced. All in a three-day work week.
A comedy of errors played out with the government’s announcement on small savings interest rates. After holding still for almost a year, against the tide of falling rates, the government (or at least someone within the government) thought it was time to lower the interest paid out on small savings in one steep cut. Unless you have been sacking out on a beach somewhere with no network, you know what happened thereafter. An early morning tweet from Finance Minister Nirmala Sitharaman informed us that the decision was in fact an “oversight”. The cut was withdrawn and unchanged rates were notified.
The intuitive reaction was—of course they rolled back! It’s election season! Maybe, but there are far more important questions here to think about.
Over the years there have been long committee reports full of charts on linking small savings rates to benchmark bond yields. That’s the time tested answer to the small savings dilemma. And it is logical. Interest rates on one set of instruments can’t be out of line with those offered more broadly across the economy. For many reasons.
But the other side of the argument—the humanitarian and even economic one—cannot be ignored. Pensioners rely on small savings and interest from them. Many use these instruments as their only savings. How do we square the impact on this cross-section of society with what is technically right?
The economist types will argue that it is all about real rates. If inflation is low and nominal rates fall, the real rates savers are getting will still be reasonable. Maybe. But inflation varies widely across regions and is also based on where your spends are. For instance, healthcare inflation, which may impact pensioners the most, may be running well ahead of headline CPI inflation. There are other questions. If returns on small savings and fixed deposits stay low, will savers be forced to spend less and save more to meet long term goals? Will they be pushed towards greater risk to meet their return requirements and long term savings needs? Then there is the issue of savings in the context of income and income expectations. TCA Srinivasa Raghavan, writing in the Business Standard, raised an important issue recently. As more people move towards ‘gigs’ rather than jobs, income volatility has increased. “We are thus in a low-income, high-volatility trap,” he wrote in this piece.
Tough questions. But no, it probably wasn’t any of these considerations that led to the government’s rollback.
That wasn’t the only comedy playing out this week with decisions.
The RBI was to implement a 2019 (yes, 2019!) circular on auto debit payments. The industry didn’t wake up in time and raised a stink about how customers will be inconvenienced. A visibly angry regulator extended the implementation deadline in customer interest and said that the non-compliance will be “dealt with separately.” Translation—you can run but you can’t hide.
Alongside, the RBI also delayed the implementation of another provision which would have stopped payment aggregators from storing card details. That was to be implemented mid-year and rumblings about its impact (i.e. you would have to do the hard work of typing in your full card number and not just your CVV) had already begun. The RBI nipped it in the bud.
But to quote Russell Peters (forgive us): “Someone gonna get a hurt real bad.”
Somewhere in the middle of the local stops and starts, a cross-border drama played out with Pakistan deciding to import cotton and sugar from India, only to reverse the decision within a day.
Not all decisions and deadlines went wrong. The RBI, this week, allowed another set of Covid measures to lapse, including the one-time SME restructuring scheme. It deserves props for not letting regulatory forbearance linger. Tougher decisions lie ahead.
Till next week.