Who needs small savings?

Not states, but the infrastructure sector

The national small savings system is no longer what it set out to be. It was meant to attract financial savings from those at the edge of the market economy and pass on the proceeds as loans to the central and state governments. The rural savings part of it was – and still is – in large part administered through the postal system, reaching people and places commercial banks do not. But bank nationalisation, branch expansion, rise of regional rural banks and importance of tax-incentivised savings like the Public Provident Fund Scheme and National Savings Certificates have reduced the role of both rural savings and the post office in the overall picture. What is more, with successive finance commissions addressing the resource needs of the states, they are no longer as dependent on loans from small savings as they used to be. What really calls into question the future of the system is that the National Small Savings Fund, through which all cash inflows and outflows pass, now runs at a loss.

The committee appointed to devise a more viable and meaningful future for the fund in its report makes many recommendations but does not directly question the fund’s raison d'être. You don’t need a small savings scheme to find resources for states. What you do need is to promote financial inclusion and use for nation building the small savings of millions of people. For that, it is necessary to make the schemes and instruments under the fund as attractive as possible. Two likely developments in the near future will powerfully affect the savings system: introduction of core banking in postal operations and the unique identification system for every Indian resident. These together will transform the quality of service offered to postal savers and make maintaining multiple accounts at multiple locations impossible. So the committee is right to recommend that special rates of return, tax incentives and permissible ceilings be continued. But it is wrong to recommend that the commission to sales agents be gradually brought down across the board. The current system is indeed sales-driven and should remain so. The low popularity of government paper among retail savers and the poor individual response to the new pension scheme point to the need to continue selling the small savings schemes at the grass-roots level.

The next issue is where or how the small savings system should invest what it collects so as to meet its costs and service deposits. The report recommends part of the funds be lent to infrastructure players who can issue paper to the fund at a mark-up to the current secondary yield of instruments like the 10-year government paper. There will be some argument over the mark-up, but it must be remembered that the rates of return of infrastructure projects are being constantly calculated by financial institutions and the Planning Commission. Resources from small savings can be taken as topping up funding (something that was not available earlier) and a higher cost for it can be assumed. This can be kept in mind by the regulator in question while considering costs for fixing things like electricity tariffs or road toll charges. But what is vital and non-negotiable is that the postal savings operations run much more efficiently than they do right now. Mere computerisation is not enough and there is a case for far greater autonomy, preferably by turning them into a special category bank.