Rate cuts no good news for Bengal

State has close to two-fifths of country's yearly net small savings collection, the preferred investment for many households

The prospects of a falling interest rate might not sit well with West Bengal, set for legislative assembly elections next year.

Last month, soon after the Reserve Bank of India reduced its policy rate by 50 basis points to 6.75 per cent, its fourth cut since January, Union finance minister Arun Jaitley said the government might look at reducing the interest rates on small savings.

As of January, this state had the biggest contribution to the small savings pool. The gross small savings collection for West Bengal till January was Rs 26,667 crore or 13 per cent of the country total of Rs 197,825 crore.

In net collection, Bengal had 39 per cent of yearly small savings collection at Rs 1,701 crore, against the total of Rs 4,318 crore.

Second to West Bengal, Uttar Pradesh's contribution to the small savings pool was the highest, accounting for 12 per cent of gross and 34 per cent of net collections.

Thus, with a large part of the Bengal population relying on small savings for investment, a fall in the rate is not good news for households.

Interestingly, the state has also seen a consistent decline in small savings collection since 2010-11. From Rs 33,44 crore in that year, it fell by 29 per cent in 2011-12, to Rs 23,803 crore. Net collections in 2011-12 saw a decline of Rs 987 crore - redemption was more than collection. Much of the decline was attributed to the falling interest rate at the time, coupled with the rise of multi-level marketing companies.

However, after the scam in the Saradha collective investment scheme, small savings collection again saw a surge. The scam surfaced in April 2013.

Between 2012-13 and 2013-14, net small savings collection in Bengal rose from Rs 126 crore to Rs 2,399 crore, a rise of 1,800 per cent.

"We will know the impact of the fall in interest rates only after the new rates are announced. Much will depend on how these compare with those offered by banks,"said, A K Chauhan, joint director, National Small Savings Institute, Nagpur.

Last year, when the interest rates on small savings schemes had become unattractive, the fall in net collections was one the lowest in Bengal.

Maharashtra has seen a decline of more than 400 per cent in net collection and Rajasthan by 196 per cent. In the case of Bengal, the drop was only 12 per cent.