Small savings lose sheen in FY20 despite premium interest rates

Indicative of a possibility that people redeemed their savings for consumption after a likely loss in incomes

In what could signal a decline in individual incomes well before Covid-19 set its spikes in India, small savings by Indian households collapsed to near-zero in FY20, preliminary data released by Reserve Bank of India in its annual report shows. This data refers to the net of contribution to, and redemption from, small savings instruments. 

Savings in the form of “claims on government” dropped from being 1 per cent of the gross national disposable income (GNDI) in FY19 to zero in FY20, the data showed. At the same time, pension and provident funds, insurance funds and bank deposits saw an enhanced flow of money compared to the previous year. 

Now, small savings—which include post office savings deposits, national savings certificate and other schemes—are usually the preferred savings instruments for individuals across the board: from the informal sector worker, to the woman working as a farm hand in a village, to that salaried guy in the city who is saving for his daughter. On the other hand, insurance and provident funds are largely the savings haven for the middle and upper-middle class. 

Putting these data together, the vanishing of small savings in FY20 could indicate that the relatively vulnerable and weaker households could not put money into their preferred savings instruments in FY20, or pulled out (redeemed) money from existing deposits or certificates, while the well-off bolstered their social security with precautionary savings.

The RBI annual report pointed in to slowing income growth in FY20. Its surveys in July also noted that consumer confidence is at an all-time low partly due to pessimism related to incomes. 

“Financial markets froze (towards the end of 2019), financial institutions started bracing up for a brutal onslaught of balance sheet impairment, extreme risk aversion set in and as incomes stopped flowing, especially to the defenceless, households and businesses alike made a dash for cash,” the annual report noted.  

The growth of gross domestic product plummeted to its lowest in more than a decade in FY20, underlining the stagnation in incomes. But experts said there is more to it than just slowing income growth. 

“This collapse in small savings could indicate a change in income distribution in the year of economic slowdown. The relatively poor, who are the main subscribers to these, seem to have withdrawn money strongly from these savings, likely for keeping up the level of consumption,” said Pronab Sen, former chief statistician of India.  

But he also added that there could be other factors playing out, and that the data needs further validation. 

The category—“claims on government”—mostly includes small savings such as post office savings deposits and national savings certificate, and a minor part in terms of household investments in government securities. 

Since 2015-16, and more particularly since demonetisation, people had begun saving wholeheartedly in small savings instruments, to an extent that the overall collection had grown to Rs 2 trillion in FY19. It was in this period that the central government began to use these monies liberally for financing its fiscal deficit. 

With money effectively vanishing from the small savings channel, it is likely to have had a huge impact on the fiscal balance in FY20. Even according to provisional estimates, gross fiscal deficit in FY20 stands at 4.6 per cent of GDP, way above the budgeted plan of 3.5 per cent.

The precipitous fall from Rs 2 trillion to zero is also interesting in the light of the fact that in FY20, small savings gave a substantially higher return over fixed deposits in banks. Towards March 2020, while a saver fetched 6 per cent interest on 1-year term deposit in SBI, she garnered 6.9 per cent on 1-year post office savings deposit. 

Some experts said that it is likely that people withdrew small savings to save in the form of cash when the lockdown was announced. The government began its first lockdown phase from March 23, when the financial year was yet to end.