RBI report and aam aadmi
The Reserve Bank of India's (RBI) Annual Report is a Report of great pedigree. It carries a panoramic view of the economy and highlights major issues which need attention. More importantly, the Report carries a number of pertinent issues of relevance to the common person.
Overall Prospects for 2014-15
The RBI projects overall GDP growth in 2014-15 at 5.5 per cent. There are, however, downside risks to growth and upside risks to inflation arising from the sub-normal monsoon and the geopolitical situation in the Middle East. While the disinflationary process of reducing inflation to eight per cent by January 2015 appears reasonably secure, there are doubts whether the glide path of six per cent for January 2016 would be attained as there are many imponderables such as pressures to increase the Minimum Support Price (MSP) - particularly for cereals, fiscal slippages and deterioration of India's external sector. Hence there is a need for caution in easing the present stance of monetary policy.
Both, the government and the RBI caution that any acceleration of the overall medium term growth rate to even seven per cent will require improved macroeconomic policies to foster increased activity levels and productivity, in tandem with a macroeconomic regime with positive real interest rates (i.e. nominal interest rates minus inflation), lower inflation, a moderate balance of payments and current account deficit (CAD) and a low fiscal deficit. Any unrealistic aspirations for a nine per cent growth rate without necessary prerequisites would merely inflict inflation on the masses.
The Message of Gross Domestic Savings
The Annual Report (Pg 20, Table II.3) carries a telling message to the authorities. Gross domestic savings as a percentage of GDP fell from an average of 35 per cent in 2005-06 to 2007-08 to 30.1 per cent in 2012-13. The household sector savings, which accounted for over 70 per cent of the overall gross domestic savings, fell from 25.2 per cent in 2009-10 to 21.9 per cent in 2012-13. Furthermore, within the household sector, financial savings (net) declined from 12 per cent in 2009-10 to 7.1 per cent in 2012-13. Household sector savings in physical assets (gross), however, rose from 13.2 per cent in 2009-10 to 14.8 per cent in 2012-13.
Another revealing fact is that of the total financial savings of the household sector, deposits account for 58.8 per cent, life insurance funds account for 16.6 per cent and provident and pension funds for 11.7 per cent. While life insurance, provident funds and pension fund investments have been provided large deduction from income under Section 80C up to Rs. 1.5 lakh per annum, bank deposits are treated as a poor relative and provided a very nominal deduction from income up to Rs 20,000 for savings bank accounts.
What is outrageous is that the dividends from companies are totally tax-free from income tax in the hands of individuals without any limit. There is a Dividend Distribution Tax, but it is very low compared with the tax on bank deposits. I have repeatedly stressed that the tax policy on household sector savings is nothing short of a fiscal atrocity. The veteran T. N. Pandey, former Chairman of the Board of Direct Taxes, has time and again pointed out this anomaly but governments of different hues have not corrected this glaring fiscal inequity. If the government persists in this inequity, household sector financial savings will continue to fall, and with this one can say goodbye to a sustained higher growth rate.
Since bank deposits and other debt instruments account for a very large part of household sector financial savings, it is vital that interest rates on savings instruments are not reduced prematurely.
The RBI Annual Report has an exclusive chapter on Credit Delivery and Financial Inclusion (pg 64 to 71). As at March 2014, there were 46,126 village outlets via bank branches. The total number of Basic Savings Bank Deposit Accounts (through bank branches and business correspondents) was 243 million, amounting to Rs. 31,230 crore. In comparison, overdraft facilities were availed by only 5.9 million, amounting to only Rs. 1,600 crore. Thus, while there is substantial garnering of deposits in these accounts, credit facilities are scanty (Pg 67, Table IV.7).
The Pradhan Mantri Jan Dhan Yojana (PMJDY) launched on August 28, 2014, is a very ambitious project. The new initiative has the merit that apart from opening a Basic Savings Bank Account, it will be packaged with a free accident insurance policy for Rs. 1 lakh and an overdraft facility up to Rs. 5,000. There would be a Rupay debit card and for accounts opened between August 29, 2014 and July 26, 2015, there would be a life insurance cover of Rs. 30,000. While as a concept the scheme gives hope of a major breakthrough, effective implementation, rather than a scoreboard approach is vital. Moreover, financial inclusion by itself is not sufficient. There is also a need to generate real sector activity.
Please Note: This article was first published in The Freepress Journal on September 08, 2014. Syndicated.
This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.
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