Reduction in NSS rates

In its periodic review, the Central Directorate of National Savings (CDNS) has revised downwards profit rates on its various National Saving Schemes (NSS) by up to 84 basis points (bps) with effect from 1st January, 2012. The rate for Special Saving Certificates has been reduced by 83 bps to 11.67 percent, for Regular Certificates by 84 bps to 11.76 percent and for Behbood and Pensioners Certificates by 54 bps to 13.86 percent. The rate for Defence Saving Certificates is down by 78 bps to 11.90 percent and that for profit and loss accounts by 25 bps to 8.25 percent. Although, a modest reduction in the profits rates of various National Saving Schemes would appear to be a minor development, yet it could have a substantial impact on various segments of the economy, particularly the financial sector and the savers who were planning to invest in these schemes. A lower profit rate on NSS could induce the savers to consider about alternative sources of investment like term deposits with banks or deployment of funds in the stock exchange though it could be argued that other sources of investment would still be unattractive for certain categories of investors like widows and pensioners who are usually captive investors and would like to invest in risk-free avenues with regular income. Nonetheless, it would hurt the ordinary savers because now they would get lower profits and the persistence of high inflation would further erode their purchasing power. The worst affected would be those who had saved throughout their lives through provident funds and other saving instruments in order to enjoy their years of retirement by getting a reasonably high regular income from the NSS. It would also be damaging for the economy if a combination of lower expected income from investment and high inflation would tend to adversely affect the will to save of the ordinary people, thus depressing the already dismal saving rate of the economy and retarding its prospects of growth. It is also easy to explain that a lower rate of return on financial savings in the domestic economy could have a negative impact on the foreign sector and promote dollarisation of the economy. A reduction in NSS rates would, however, benefit the government and banks in certain ways. Borrowing by the government through NSS to finance its widening budget deficit is not only comparatively costly for the government exchequer but also increasing at a very rapid rate due to various reasons. Lowering of the rate would reduce the debt-servicing burden of the government and release resources for other more productive uses, provided the government in future behaves carefully and prudently in fiscal matters. Banks have always been advocating for a lower rate of return on NSS to enhance the flow of savings to banks so that they could expand their business activities. The latest move by the government is certainly in line with their policy preference and could indirectly lead to higher private sector credit expansion to a certain extent. Overall, however, while there are both pros and cons for a downward adjustment in NSS rates, a more pertinent question was the need to make such a move at this particular point in time when there was no change in the monetary policy of the State Bank, inflation had not decelerated markedly, the current account of the country had not improved, market forces had not pushed down the interest rates in the domestic market substantially and the government's dependence on this source had not declined due to either reduction in the budget deficit or the ample availability of other sources of financing. Although the idea is somewhat far-fetched but the government might have thought that other avenues of investment for ordinary people are shrinking fast due to a host of unfavourable factors and the captive investors have nowhere to go but to keep investing in the NSS. If this is true, it would be akin to taking undue advantage of a bad situation. Copyright Business Recorder, 2012