Low rates invitation to loot

Low rates invitation to loot

Savings is being disincentivised and loot of public money is being condoned and incentivised. As lower interest rates on deposits is a direct...

Savings is being disincentivised and loot of public money is being condoned and incentivised. As lower interest rates on deposits is a direct invitation to loot by the biggest industrialists. Whereby, Indian banks are following the Western pattern of robbing the poor to pay the rich. Clearly, this is bad economics and unfortunately the Economic Survey advocates it, succinctly a prescription to ruination.

Notably, the decision to cut interest rates on PPF, national savings certificates and Kisan Vikas Patra is politically harmful for the ruling NDA combine and economically it will set a pattern of downward rolling. Given that these instruments which have been funding government coffers to carry out development – hits the largest section of the lower middle class who are supposed to be the engine of growth.

Ironically, they are also supporters of the political structure which replaced the UPA in 2014. They believe in the slogans of low taxes as also their political masters who they feel would protect their interests. Yet, according to a RBI report, “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 per cent 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 macro-economic imbalances. The household savings rate generally hovered around 23 per cent since 2004”. Besides, the IMF’s World Economic Outlook too forecasts a slowly rising GDP growth rate for India till 2020, from 7.3 per cent to 7.7 per cent, but adds that both savings and investment rates, as a percentage of GDP, would be even lower than in 2014.

For instance, the investment rate was 31.6 per cent of the GDP in 2014 and will fall to 30.59 per cent in 2017, and then huff and puff its way up to 31.1 per cent of the GDP by 2020. Undeniably, India needs to listen to the warning and must not follow the Western method of banking. Remember, 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 this.

Moreover, government economists are suggesting taxing all savings ignoring the IMF warning. They have given a specious plea that disincentivising savings would lead to consumption. This does not happen. People in countries like India are deeply steeped in traditional values while the West incentivizes a debt-led growth. Traditionally, Indians do the opposite. They save and buy, making them less dependent on debt.

This has been the greatest strength on the country’s economy whereby savings have fueled the financial system. The high savings rate has been responsible for funding a large part of the development process since Independence. Surprisingly the Economic Survey itself avers, “Income tax is inherently biased against savings; it leads to double taxation in so far both the savings and earnings are taxed”. Further, it extols the virtues of EEE exemption of savings from taxes at all levels.

Indeed, it is a bit shocking that this people-centric Government allows itself to be misguided by the concept of EET tax all savings even if it is for the purpose of social security under the National Pension Scheme. “This is also a myth”, propounds the Survey as “small savers are largely outside the tax net”.

Scandalously, tax rates are the highest in India. Anybody, even a beggar, pays a minimum 40 per cent indirect taxes to the Centre and states. As 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 per cent to these taxes.

Questionably, 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 as also the deposit interest regime and take the country to fast growth. Since the presentation of the 1992 Budget by Manmohan Singh, an illusion has been created that the stock market is the ultimate answer to savings.

This proved wrong soon with the busting of the Harshad Mehta scam, apparently supported by some large corporates. The route then was simple surreptitiously divert bank funds. Importantly, 25 years of Manmohanomics did little to protect the banks which thrive on a 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 93000-98000 crore to banks was followed by the Fodder scam, JMM bribery case, several other scandals like mining, coal, Bellary iron ore, telecom’s 2G spectrum, UTI, LIC, Mercantile Bank, Indian Bank, hush-hushed Indian Overseas Bank, Augusta Westland copter, Commonwealth Games, Taj Heritage Corridor and Satyam swindles - an endless list that leaves no sector.

Needless to say, by trying to force lending rates low, the country is only trying to reward those who hit the soft funding belly. This is what the 1993 NN Vohra Committee had commented on the “activities of crime syndicates/mafia organizations which had developed links with and were being protected by Government officials 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 which is not his income, pays higher bank charges but also his ultimate dream of a better life. This is a worrying trend as it shakes peoples’ confidence.

Therefore, the government needs to take steps which reverse the process. It has to protect the banking sector. These cannot be “re-capitilised” endlessly with taxpayers’ money. It 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 cheap money.

This has to be backed by corresponding deposit rates at a minimum of at least 9 per cent and freed of multiple taxation. Undoubtedly, this move would be a deterrent whereby corporates would be forced to take the bond and equity route for funding. If banks are not protected and household savings encouraged, the country might move to an abyss which the IMF has indicated specially against the backdrop of high macro-economic imbalances which need to be corrected.

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