Why no one is worried about savers

Economists are like sheep. They like to move in a herd. If one of them says that the Reserve Bank of India (RBI) and banks need to cut interest rates in order to revive the economy, most others follow.

Take the idea of a central bank and commercial banks cutting interest rates when the economy of a country is not doing well. Why do economists offer this advice? The idea is that as banks cut interest rates, people will borrow and spend more. At the same time corporates will borrow and expand, by setting up more factories and offices. Businesses and the economy will benefit.

The trouble is that what the economists believe in doesn’t always turn out to be true. Or to put in a more nuanced way, there is a flip side to what they recommend. And I have seen very few professional economists talk about the flip side till date.

In fact, low interest rates hurt a large section of the population especially during an economic recession and contraction. In India, a section of the population is dependent on the level of interest rate on bank deposits (especially fixed deposits).

Currently, the average interest rate on a fixed deposit is around 5.5%. The inflation as measured by the consumer price index in September stood at 7.34%. Hence, the actual return on a fixed deposit is in the negative territory and has been so through much of this year. This doesn’t even take into account the fact that interest earned on fixed deposits is taxable at the marginal rate.

This hurts people living off interest income, in particular senior citizens. Senior citizens whose fixed deposits have matured in the recent past have seen their interest income fall from around 7.5-8% per year to around 5.5% per year, in an environment where food inflation is higher than 10%.

The only way to keep going for them is to cut monthly expenses or start using their capital (or the money invested in fixed deposits) for regular expenses. It is worth remembering that Indians have very little social security of the kind common in developed nations.

Lower interest rates also impact a large section of the population which saves for the future through bank fixed deposits. It is worth remembering that it is this section of the population which actually drives private consumption in the country. When returns on their savings fall, the logical thing is to cut consumption and save more. If this is not done, then the future gets compromised.

Lower interest rates also hurt institutions like non-government organisations, charitable trusts etc., which save through the fixed deposit route. They even impact returns on insurance policies and provident/pension funds.

The stock market-wallahs love low interest rates because some investors continue to bet on stocks despite the lack of company earnings. The price to earnings ratio of the stocks that constitute the Nifty 50, one of India’s premier stock market indices, is currently at more than 34. Such high levels have never been seen before. It’s not the possibility of future high company earnings which have driven up stock prices but the current low interest rates, leading to more and more people trying to make a quick buck on the stock market.

Between March 27 and October 9, the deposits of banks have increased by a whopping Rs 7.4 lakh crore or 5.4%. In the same time, the total loans of banks have shrunk by Rs 38,552 crore or 0.4%. This basically means, on the whole people are repaying loans instead of taking on fresh ones, despite lower interest rates.

In this environment, with banks unable to lend out most of their fresh deposits, it is but natural that they will cut interest rates on their fixed deposits. You can’t hold that against them.

But what has not helped is the fact that the RBI has been trying to drive down interest rates further by printing money and pumping it into the financial system. Between early February and September end, the central bank has pumped more than Rs 11 lakh crore into the financial system. Not all of it is freshly printed money, but a lot of it is.

This has apparently been done to encourage corporates to borrow. The bank lending to industry peaked at 22.43% of the gross domestic product (GDP) in 2012-13. Since then it has been falling and in 2019-20, it stood at 14.28% of the GDP. Clearly, Indian industry hasn’t been in a mood to borrow and expand, for a while now. And high interest rates, cannot be the only reason for it.

The real reason for the RBI pumping in money into the financial system and driving down interest rates has been to help the government borrow money at low interest rates. As tax collections have fallen, the government needs to borrow significantly more this year than it did last year.

All this has hurt the saver. But clearly like the corporates and the government, the savers are not organised and do not have a voice. Hence, no one is talking about them.

We already know that no economist talks about this phenomenon or more specifically the fact that low interest rates and high inflation should have led to a cut in consumption. How big and significant is that cut? Is this cut in consumption more than the loans given by banks because of low interest rates? How is it hurting the Indian economy?

These are questions that need answers. But the problem is, to a man with a hammer everything appears like a nail. For economists, interest rates are precisely that hammer which they like to use everywhere. This situation is no different.