In­dian PM risks mid­dle-class back­lash in bid to spur lend­ing

The Pak Banker - - 6BUSINESS -

Prime Min­is­ter Naren­dra Modi risks a po­lit­i­cal back­lash among the mid­dle class as he seeks to coax banks into low­er­ing in­ter­est rates. Crit­i­cism is grow­ing against his gov­ern­ment's move last week to slash in­ter­est rates on small sav­ings pro­grammes used by as much as a third of In­dia's 1.3 bil­lion peo­ple. Banks have long cited the gov­ern­ment-backed schemes as a rea­son for fail­ing to trans­mit rate re­duc­tions from the cen­tral bank.

The shift to link the pro­grammes with mar­ket rates is test­ing Modi's re­solve as he seeks to kick­start growth that re­mains shaky de­spite out­pac­ing other ma­jor economies. A back­lash al­ready prompted him to back­track on a bud­get pro­posal to tax the prov­i­dent funds of 37 mil­lion em­ploy­ees, a sign of his re­luc­tance to stick with dif­fi­cult po­lit­i­cal de­ci­sions ahead of a slew of state elec­tions.

"It will af­fect the po­lit­i­cal in­ter­ests of the gov­ern­ment," Satish Misra, an an­a­lyst at the Ob­server Re­search Foun­da­tion in Delhi, said of the rate re­duc­tions. "If eco­nomic growth re­vives it will def­i­nitely ben­e­fit the gov­ern­ment and they will say more jobs have been cre­ated. Whether they will suc­ceed is the ques­tion."

Modi has strug­gled to fend off op­po­si­tion at­tacks that his gov­ern­ment favours the rich over the poor, a nar­ra­tive that prompted him to drop ef­forts to make it eas­ier to ac­quire land. Af­ter his party got crushed at the polls in Bi­har in Novem­ber, Modi sought to pivot with a pro-farmer fed­eral bud­get last month.

Still, the cuts to small sav­ings rates-by as much as 130 ba­sis points-re­flect the ten­sions over his broader goals to re­vive in­vest­ment while keep­ing in­fla­tion un­der con­trol in a na­tion where the ma­jor­ity of the pop­u­la­tion lacks so­cial se­cu­rity and lives on a few dol­lars per day. The main op­po­si­tion party Congress called the move "a crim­i­nal breach of trust with hap­less peo­ple," while sim­i­lar barbs fol­lowed on so­cial me­dia. Small sav­ings in­clude cash de­posited at post of­fices, which dot the na­tion in­clud­ing in ar­eas where there may be no bank branches. There are spe­cial in­cen­tives for vul­ner­a­ble sec­tions of the pop­u­la­tion such as se­nior cit­i­zens and girls, and the re­turns are of­ten ex­empted from tax. In­di­ans in­vested a net $93 bil­lion in small sav­ings pro­grammes of post of­fices in the year through March 2015. That's less than 7% of the $1.4 tril­lion poured into com­mer­cial bank de­posits. Post of­fices, which have ma­jor share of small sav­ings, had 399 mil­lion ac­counts last fis­cal year. The num­ber of cus­tomers may be smaller as many peo­ple have mul­ti­ple ac­counts.

A re­duc­tion in small-sav­ings rates is bad news for those with large bal­ances in fixed de­posits, es­pe­cially se­nior cit­i­zens, said re­searchers at An­gel Broking. It pre­dicted that banks would cut base rates by about 100 ba­sis points next year.

Af­ter the lat­est cut, a one-year fixed de­posit in postal sav­ings will fetch a per­son 7.1% from 1 April, against 8.4% at present. In­dia's largest lender State Bank of In­dia pays 7.25% on a de­posit of sim­i­lar ma­tu­rity. Re­serve Bank of In­dia (RBI) gover­nor Raghu­ram Ra­jan said last year that link­ing small-sav­ings rates with mar­ket in­ter­est rates should im­prove trans­mis­sion of mone­tary pol­icy. As of early De­cem­ber, banks had passed on less than half of 125 ba­sis points worth of cuts last year, ac­cord­ing to the RBI.

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