This is a story of Young India, which is both India and Bharat (not necessarily in the order of importance, though). Expectedly, young Indians are smart, technology savvy but unexpectedly are risk-averse investors. Our Bharat/rural India in 2015 is now investing more (vis-a-vis 2014) and yearning to invest even more. These are some of the remarkable findings of our large random sample study of Public Provident Fund (PPF) accounts opened by the State Bank of India for the two-year period ended 2015.
PPF is a government-backed, zero-default risk, long-term small savings scheme initially started to provide retirement security to self-employed individuals and workers in the unorganised sectors. Currently, with a maximum allowable corpus of Rs 1.5 lakh, it is perhaps considered the best tax-saving scheme by all sections of people planning to invest and save. The interest rate earned out of PPF is tax-free and subsumed under the overall consolidated amount of Rs 1.5 lakh in Section 80C.
That the PPF scheme is indeed a darling of the masses is evident from our results. Since August 2014, when the additional Rs 50,000 in PPF was notified, the incremental deposit amount has nearly tripled (doubled) over the August 2014 (2013) deposit level. Interestingly, the number of people investing in the scheme has, however, increased at a slower rate (it has only doubled over August 2014). Also, if we look at the percentile distribution of PPF investments before and after August 2014, an additional three per cent of the population is now investing the entire permissible amount, with an additional Rs 140 on a daily basis.
This implies that perhaps more investment is being made by existing investors after the change in regulation, although new investors are getting added, particularly in urban India. This could be attributed to the scheme being more popular in urban India than rural India. One reason for this may be that the PPF investment is tax-free and more salaried people live in urban India than rural India. In hindsight, there is thus a genuine need to popularise the PPF scheme in rural India. This can happen through more of government intervention and awareness camps.
But this does not mean that rural India is not saving. In fact, if we look at state-wise data, Bihar, Uttar Pradesh, West Bengal etc each have a sizeable rural population that invests on average a significant amount in PPF. Post the change in PPF norms in 2014, rural India is investing an additional Rs 40 per day in PPF, which translates into an additional one per cent of rural income yearly.
Interestingly, if we look at age-wise distribution in PPF investments over before and after 2014, what strikes us is that an overwhelming 86 per cent of the investors (89 per cent in 2014) are in the age-group 16-55, of which 67 per cent (71 per cent in 2014) are in the middle age-group 26-45. The number of investors in the age-group 56 and above has increased to 14 per cent after 2014 (11 per cent). The irony is that two per cent of such investor population are 75 years old and above.
One way of interpreting these age-wise numbers is that the younger generation primarily invests in PPF for saving taxes whereas senior citizens do it more for social security purposes. If we juxtapose this with our result that a declining proportion of younger generation is now investing in PPF, such a trend clearly implies that the permissible PPF limit is inadequate (being subsumed with many heads in Section 80C) and the limit under Section 80C may be further enhanced.
Given that the motives for PPF investment are clearly different for our younger and older generations, the government could rationalise the deposit rates under PPF. This is all the more important, as banks find it difficult to transition to a lower lending rate regime, given that interest rates on government savings schemes act as a floor below which they cannot fall.
In our view, the ideal approach would be to shift to an age-wise interest rate structure, with rates linked to long-term bank deposit rates for age groups till 45, and offering a higher than market rate for people over 45. This will serve the purposes of (a) ensuring a lower lending rate structure, (b) adequate returns for senior citizens, (c) lower interest expenditure and (d) that the scheme runs for at least 15 years - the current prescription.
Furthermore, the government could introduce some variant of a pension-linked annuity scheme and may also look at creating some common ground between its flagship Sukanya Samriddhi Scheme and the PPF scheme. We also recommend that the minimum amount at Rs 500 be adequately revised upwards. Our results show that even at the lowest quantile of our PPF distribution, investors are putting Rs 6,000 a year or Rs 500 a month. There is also a need to alter the facility of loan taken from the PPF corpus.
We further checked the relation of spending patterns of individuals with investments in PPF and observed that the two exhibit differing relationships for different income classes. For example, those who are at the lowest quantile of income distribution are craving to invest more by stretching the number of payments in a year. An exactly opposite trend is evident for people with higher income and higher spending. Such people tend to invest less over time, as their objective is more towards saving tax.
It may perhaps be the best time for the government to introduce a set of reforms in the coming Budget to radicalise government-saving schemes, and more so for the PPF.
Soumya Kanti Ghosh is chief economic advisor, State Bank of India;
Pulak Ghosh is a professor at the Indian Institute of Management Bangalore.
Views are personal
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