X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Bias against the disadvantaged - Outside View by S.S. TARAPORE
 
 
Bias against the disadvantaged

Governor Raghuram Rajan, in a powerfully argued monetary policy statement on December 2, 2014, warded off the clamour from large industry and government to reduce policy interest rates, thereby providing succour to a large number of depositors who otherwise would have faced adverse interest rates. Over the past two decades, there has unfortunately been a tilt towards borrowers and against depositors.

Bankers' response in recent months

Although the RBI September 30, 2014 Review maintained unchanged policy interest rates, banks started lowering term deposit rates. Again, when policy interest rates were kept unchanged on December 2, 2014, banks, predictably, started reducing term deposit interest rates.

The advice given to depositors in September 2014 needs to be reiterated: depositors should quickly lock into longer term deposits whatever surplus funds they have, even if they happen to be temporary surpluses. Under the current dispensation, if a depositor prematurely withdraws a term deposit, there is no penalty. Since an increase in policy interest rates can be ruled out for the next 18-24 months, depositors would be well advised to lock into the longer maturities, up to say, three years.

Cartelisation of savings bank deposit rate

Savings bank deposits account for a fourth of total bank deposits and most depositors are small. Since the deregulation of the savings rate in October 2011, each bank has the freedom to set its own rate, but as all banks, barring a few small banks, have uniformly fixed their savings bank deposit rate at four per cent (the erstwhile regulated rate) it points to cartelisation. Banks often argue that small accounts are costly to service. This is not tenable. The bulk of small depositors are stable as these depositors do not frequently operate their accounts.

Many banks have a low Current and Savings (CASA) ratio to total deposits. For such banks, it makes sense to offer higher rates on savings bank accounts and thereby increase these deposits and at the same time reduce the proportion of the higher cost term deposits. Per contra, banks with a very high CASA could afford to lower the rate they offer on savings accounts and offer higher rates for term deposits without adversely affecting their overall cost of funds. The fact that banks neither raise nor lower the savings bank rate is reflective of the operation of a cartel.

Samir Kochhar, chairman, Skoch Consultancy, in the quarterly Inclusion for July-September 2014, has pointed out that with the bulk of banks offering a uniform four per cent on savings deposits they are obviously operating a cartel. Kochhar draws a telling inference that by offering a meagre four per cent on savings accounts banks "steal from the poor to loan the rich." Kochhar has been functioning as a pro bono public and taken up the issue with the concerned authorities. It is gathered that the Competition Commission of India (CCI) is actively pursuing this issue. It is hoped that the CCI's intervention will put an end to this reprehensible action by banks.

Miscued fiscal incentives

As work on the Union Budget for February 2015 is in full swing, it is only apposite to discuss some miscued fiscal incentives.

First, there is a deduction from income up to Rs 10,000 per annum for interest on savings bank interest for purposes of calculating income tax. A very large proportion of savings account holders are not income tax payers. Furthermore, an interest exemption of Rs 10,000 implies a savings bank holding of Rs 2.5 lakh, which reflects that this incentive is elitist.

Second, the much talked about deduction under Section 80C of Rs 1.5 lakh for long-term savings in provident funds, insurance and pension schemes etc. acts in a regressive manner; the higher the income the greater the benefit. One hopes that the Union Budget for February 2015 will consider a graded system wherein for the first Rs 50,000, the deduction could be 150 per cent, for the next Rs 50,000 the deduction could be 100 per cent and for the last Rs 50,000 the deduction could be 50 per cent. This way the system would be more equitable for the lower income tax payers and at the same time not result in any increase in the revenue foregone.

Third, the government should not hesitate to issue a tax-free government bond for individuals with a ceiling for investment by an individual of Rs 5 lakh, which, at a rate of eight per cent, would mean a tax free income of Rs 40,000 per annum. If there are concerns regarding loss of revenue, the scheme could be restricted only to senior citizens.

Fourth, a retail Consumer Price Index linked inflation-indexed government bond, with annual interest, could be issued with a three per cent real rate plus the inflation rate. Thus, if the inflation rate for a year is five per cent, the nominal interest should be eight per cent. With the commitment to bring down the inflation rate, the government should not hesitate to issue such a bond.

Fifth, with the fiscal deficit being very high in the first eight-nine months, the government slams the brakes towards the close of the year. A major casualty is income tax refunds. There should be a provision under which all tax refunds to individuals relating to a year should be paid out by the next year for refunds up to Rs one lakh. If the assessments are not completed by the stipulated date, the refunds should be paid out on the basis of the refund claimed in the return.

These measures would work towards the income tax system becoming less regressive.

Please Note: This article was first published in The Freepress Journal on December 15, 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.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

 

Equitymaster requests your view! Post a comment on "Bias against the disadvantaged". Click here!

  
 

More Views on News

How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

Jun 10, 2017

Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

Aug 19, 2017

Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

Aug 18, 2017

Buying the index now will hardly help make money in stocks even in ten years.

Trump Takes a Beating (Vivek Kaul's Diary)

Aug 18, 2017

Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

How To Read Your Mutual Fund Account Statement Correctly (Outside View)

Aug 17, 2017

PersonalFN simplifies the mutual fund account statement for you.

More Views on News

Most Popular

Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

Aug 7, 2017

The data tells us quite a different story from the one the government is trying to project.

A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

Aug 10, 2017

Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

Aug 8, 2017

Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

Signs of Life in the India VIX(Daily Profit Hunter)

Aug 12, 2017

The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

Aug 7, 2017

Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

More
 

Become A Smarter Investor In
Just 5 Minutes

Multibagger Stocks Guide 2017
Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Aug 18, 2017 (Close)

MARKET STATS