Recent signs suggest people's savings are moving in positively unhealthy directions. With inflation running high, many are seeking to maximise their returns by turning to gold, chit funds and real estate. Simultaneously, the stock of the National Small Savings Fund has been depleting. Mindful of all this, the Union finance minister in his Budget speech proposed the introduction of instruments such as inflation-indexed bonds, which will protect the savings of the poor and of the middle class from inflation.
Things are happening on the pension front, too. The minister for rural development has said the government will universalise pensions and raise the minimum rate for them. Simultaneously, the national pension authority has allowed entities managing the national pension system to invest directly in equities. It is not clear if anybody is taking an integrated view, which is a must to get people to save in a sensible and responsible way that will help the economy and themselves.
First and most importantly, unless inflation subsides, there is no way distortions can be avoided in the way people save. Index linking across the board along with high inflation has been practised in Latin America, but it is a totally forbidding scenario. The hopeful signs are that inflation has begun to subside, the fiscal authority appears to be getting a handle on its own deficit, and the monetary authority remains steadfast in holding that inflation should come down to five per cent or less.
It is within this slightly optimistic scenario that we can and should look at index linking of certain savings instruments. This will ensure that not only is the real value of people's long-term savings protected, but in old age they are able to earn a small real rate of return to take care of - if nothing else - the rising health care costs that go with living longer.
Even with low inflation, index linking will put a burden on the exchequer, as will the entirely noble and desirable idea of everyone getting a pension that is not laughably meagre. The exchequer and the system will be able to bear this burden only if the economy manages to achieve a healthy rate of productivity growth. This will leave in the government's hands a modicum of surplus that can be transferred to people with lower incomes without destabilising the fisc. Here again the slightly optimistic scenario is that the fall in the GDP growth rate has bottomed out.
While expecting the growth rate to pick up, it is important to avoid the distortions implicit in unsustainable rapid growth. With GDP numbers being unreliable, it is reassuring that the chief economic adviser has said that the right things need to be done with a degree of philosophical calm and wait for results to kick in. Not only should we not jump up and down on every half- or one-percentage point change in the growth rate, we should be strongly mindful of the quality of growth. This can be done by chasing improvements in key human development indicators with the same vigour as now devoted to GDP growth.
Important as these macroeconomic goals are, a more specific short-term agenda is needed. First, the states have to be roped in and given incentives to fight the menace of chit funds. This can be done by making the rates of return on small savings more attractive so that their collection improves, and states can again look at the small savings fund as a useful avenue for raising resources.
Second, the quickest way to do this can be to make the return available under the public provident fund scheme truly attractive and issue new series of national savings certificates that may not officially be inflation-indexed but offer a high nominal rate of return and appear so. Simultaneously, the states can be urged to crack down with a new vigour on chit funds.
In trying to wean people away from gold, again, there's a slightly optimistic development: the rate of return available on investing in gold is abating. So, third, the new savings certificates can be termed something like "gold plated" and be designed with golden edges.
As for allowing pension fund managers to invest directly in equities, there should always be a firm cap on this - say, not more than 10-15 per cent of the corpus - so that overall pension fund portfolios do not become speculative and volatile. It is also necessary to prevent speculative investment in real estate, like people owning a second or third apartment for "investment" purposes. But that subject needs separate attention. In sum, for people to save healthily, they must be able to see the real value of their long-term savings protected.
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