Small Savings and Market Mythology

Small savings occupy a rather unique position in the Indian scenario. Broadly, three types of small savings schemes are in operation: postal deposits, saving certificates, and social security schemes, such as the Public Provident Fund (PPF) and retirement schemes. While postal deposits are akin to bank deposits, the others are medium-term instruments designed for specific purposes. Unlike in developed countries like the US and the UK, where some such schemes do operate, in India resources mobilised by small savings schemes constitute a significant proportion of the household sector’s total financial savings. For instance, the share of small savings as a percentage of net financial savings of the household sector rose from 7.9 per cent in 1996-97 to 13.8 per cent in 1998-99. In fact, in the 1990s, gross collections from these schemes have grown at a phenomenal rate of 17 per cent per annum, compared with bank deposit growth of around 13 per cent. Gross collections rose from Rs 18,920 crore in 1990-91 to Rs 75,542 crore in 1999-2000. In other words, small savings appear to have imparted an element of dynamism to financial savings growth, over the period. It may be recalled here that the phenomenal expansion of commercial banks, both in terms of widening and deepening of the banking system, in the early 1970s was responsible, to a considerable extent, for enabling the Indian economy to graduate into a high-saving economy in the latter half of the 1970s (‘The High Saving Phase of the Indian Economy’, occasional papers, RBI, June 1980). Was such a role being played by small savings in the 1990s? It is necessary to raise this question because savings are critical to development; in fact, Arthur Lewis defined development simply as a process of converting a 5 per cent saving economy into a 12 per cent saving economy. The Tenth Plan seeks to raise the gross domestic savings from the base of 26.3 per cent of GDP to 29.6 per cent, and the household sector’s savings from 19 per cent to 19.4 per cent (draft approach paper to the Tenth Five-Year Plan, 2002-2007, page 11). What role should be assigned to small savings in this effort of further raising India’s savings rate?

One looks in vain for answers to such macroeconomic questions in the report of the expert committee to review the system of administered interest rates and other related issues (chairman: Y V Reddy, September 2001). After all, the question of interest rates on savings cannot be considered in isolation from the overriding objective of achieving a higher savings rate. Instead, one is treated to a rhetoric on the market mythology, and to a distorted view of small savings as a source of financing fiscal deficit.