Issues Related to Small Saving Instruments
- Negative Real Returns: Due to the current high inflation, all small savings instruments, except PPF and Sukanya Samriddhi Yojana, are currently yielding negative real returns.
- Low Savings Rates and Benchmark Government Bond Yields are Correlated: However, the government has not raised interest rates despite the rise in G-Sec yields.
- Depositors are Incurring Losses: While the one-year bank fixed deposit rate is about 5.3%, inflation has risen to above 7%. It implies that after accounting for inflation, depositors are losing money.
- Retail Price Inflation: Despite being higher than banksâ fixed deposit rates, the current rates on modest savings plans may have dissatisfied savers, given that retail inflation reached 7.97%.
- The Nation Lacks an Adequate Social Security System: Technically speaking, negative real rates encourage spending and discourage saving. This could then increase inflation and result in even lower real rates.
Small Savings Instruments
Small Savings Schemes are a collection of savings instruments run by the federal government. It aims to encourage all residents, regardless of age, to save consistently. They are well-liked because they offer perks such as a sovereign guarantee, tax advantages, and returns that are typically higher than bank fixed deposits. The Finance Ministry has reassessed the interest rates for modest savings plans. The interest rates have been reviewed every three months since 2016. The National Small Savings Fund collects all deposits made through different small savings programs. The central government uses the funds to pay for its budgetary deficit. Small savings programs are created to offer the public secure and alluring investment options while simultaneously mobilizing funds for development.
The programs can be divided into social security programs, savings certificates, and post office deposits.
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