Out of whack

It does not take a genius to figure out that post office savings schemes are currently the best thing going for the Indian saver.

The evidence of this is available from the numbers for the first quarter of fiscal 2005, with small savings collections soaring by over 32 per cent to Rs 42,307 crore. As against this, the growth in bank deposits has been just half as fast.

As on July 30, 2004, aggregate deposits of the banking system grew at 17 per cent year-on-year. While money will continue to pour into banks for want of other low-risk alternatives, more and more people are obviously heading towards the nearest post office.

The money flowing into so-called small savings schemes is still dwarfed by the Rs 2,30,000 crore that flowed into banks between April and July-end this year, but for policy-makers what should matter is the broad trend, and not just the volumes.

If small savings continue to grow at the rate they are now doing, in a few quarters from now they will completely distort the interest rate structure and become a huge drain on the exchequer""both the Centre and the states.

It is worth looking at the composition of growth in post office schemes. The big cash pullers are schemes that mirror bank deposits""savings and fixed deposits""and not longer-term instruments like the National Savings Certificates (NSCs) or even the public provident fund (PPF), both of which come with tax advantages.

Savings deposit schemes have grown at over 38 per cent during April""June, 2004, while savings certificates such as NSCs and Kisan Vikas Patras have grown at 29 per cent and PPF at 16 per cent.

While it may be true that NSC and PPF deposits tend to spike more towards the end of the fiscal year, the relative growth rates of various post office savings schemes are still important enough for policy-makers to take note.

The implication is clear: it is money that would normally have gone into bank deposits that is moving into post-office schemes, seeking higher returns. And since these administered rates are well above market rates, in effect they are subsidised by the state and central exchequers""and effectively taxpayers.

Given the sympathy everyone seems to have for the small saver, politically it may be expedient to pretend that this is a small price to pay to keep people happy. But the bulk of the fresh inflows may well be coming from the better-off sections, and not small savers.

Large chunks may even be coming from higher bracket taxpayers, and we thus have the irony of taxpayers subsidising themselves though yield-distorting savings instruments. This problem will accentuate in the future when banks enter the picture to sell NSCs and such like instruments.

Once that happens, the sheer ability of banks to distribute and market such schemes will speed up the inflows. Thus far, the only factor preventing the faster spread of postal savings instruments has been their relative inaccessibility to middle-class savers and their illiquidity. Once banks enter the picture, things will change.

The big jump in postal deposit schemes in the last quarter shows that when it comes to chasing higher returns, savers are willing to enter dingy post offices and put up with queues and surly staffers.

The government needs to take a second look at postal interest rates and lower them before it is presented with an unsustainable interest subsidy bill.