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A neglected class waiting for early relief

It will be a sad day if the debates on interest rates and the economy bypass senior citizens

INTEREST RATES have already been on the ascendant for some months now. The Reserve Bank of India's decision on June 8 to mark up its short-term interest rate benchmarks, the reverse repo and repo rates, will only reinforce the trend of rising interest rates.

The RBI action comes within days of a hike in petrol and diesel prices. Most analysts have concluded that the central bank intends to strike at inflation expectations. The RBI, which did not increase interest rates when it announced its annual monetary policy in April, is following the world's major central banks, including the U.S. Federal Reserve, the European Central Bank and the Bank of Japan. The wisdom of the latest RBI move, its timing as well as its impact on inflation are all matters that can be debated endlessly.

It is clear that most banks will first hike their lending rates rather than their deposit rates. This is because in recent times at least, banks as a class are not having any real competition in the area of deposit mobilisation. With the recent stock market correction and the inability of even mutual funds to protect investors, the options for the common man have become fewer.

A hard hit class

One aspect of the interest rate policy that deserves closer scrutiny is its impact on a section of the population that has so far been kept out of major economic decision-making — the class of senior citizens and others dependent solely on interest income for survival. It is pertinent to note that most interest rates quoted by banks are decontrolled in the sense that they are set by individual banks rather than the RBI. A major exception of course is the savings bank rate that is still fixed by the central bank.

However, some important rates having an equally direct bearing as bank deposit rates on individuals are "administered,'' which means they are still controlled.

These include the rates on deposit schemes offered by the National Savings Organisation (NSO), the post office savings schemes and the yield on the corpus of employees' provident fund schemes offered through the EPFO. All these, though kept outside the gamut of market-determined rates, have a strong connection to the market forces of demand and supply.

For instance, when interest rates in the country came down to historically low levels some time back, there was a strong clamour from certain vocal sections to bring down these rates too. To a large extent the Government has not been immune to such pressures.

Interest rates on Public Provident Fund balances have been brought down to 8 per cent. The trustees of the EPFO have had to reconcile several conflicting claims before lowering the yield from the previous 9.5 per cent. The post-office monthly income scheme which offers 8 per cent on a six-year deposit lost one of its most attractive features: a bonus of 10 per cent of the deposit amount on maturity. Bowing to pressure the Government introduced a scheme for senior citizens that has a yield of 9 per cent.

The efforts to align these and other administered rates with market rates have however lost much of their rationale at a time when interest rates are rising and when payment of 9 per cent under the senior citizens savings scheme looks normal. Some banks have already announced fixed deposit schemes for senior citizens that carry 9 per cent interest rate (subject to conditions). The debate on EPF rates now needs to take note of the fact that the market interest rates too will go up.

The concerns of those dependent on interest income from banks, the post office and a few other avenues have never been fully articulated.

Silent sufferers

A sizable percentage of them is made up of the retired and the elderly and these do not form part of a vocal constituency. Most of them belong to a generation that has been on the wrong side of the interest rate policy. In their prime, they had no access to retail loans, including home loans that would have made it possible for them to own an asset.

Also, long-term contractual savings schemes (life insurance), then, did not take into account the fact that interest rates over the medium term would come down so drastically; that what seemed to be a decent corpus once is barely sufficient to eke out a living after retirement.

Among major banks and non-banking finance companies the trend has been very clear. In many instances today's deposit rates are only slightly over half of what they were 15 to 20 years ago. The PPF offered 14 per cent yield once. At that time no one expected that the yield would be altered at all. It is true that interest policy should be dynamic. One need not hark back to the good times then and expect the Government to offer "above market'' yields of say 12 per cent or over. But the point is this: when there are no social security schemes worth mentioning, should not the Government take into account the barest minimum needs of a vulnerable class?

Remember that when they began their careers long ago, there were no health insurance schemes and the like. And now, if they have crossed sixty, insurers will not admit them.

And the cost of health care has increased enormously. It would be a sad day if debates over inflation and other current macroeconomic issues bypass vulnerable sections such as pensioners, retirees and those dependent on interest income.

C. R. L. NARASIMHAN

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