Budget 2024-25 is going to be announced shortly. Households generally concentrate on direct tax announcements, especially on income tax, which affect their future expenditure and savings. Savings not only affect investment but also future consumption. Interest rate and savings are positively co-related. From the households’ perspective, primarily inflation and tax decide the real return on savings.

Domestic savings are the primary source of investment. Therefore, savers must be encouraged. However, the average interest rate in the last decade has been declining, be it demand deposits or term deposits with marginal improvement in 2023 (Tables 1 and 2). This trend is true for both post office savings and scheduled commercial banks’ (SCBs’) savings.

Looking at e Reserve Bank of India’s key indicators, the savings rate of the various SCBs varied from 2.70 per cent to 3 per cent in recent years, which was 3.50-4 per cent range before August 2017. The one-year term deposit (TD) rate declined from 8.40 percent in 2014 to 4.40 per cent in 2022 with some improvement (6.9 per cent) per cent in 2024, yet lower than 2014 levels.

The popular TD schemes like PPF, NSC and Kisan Vikas Patra also saw a noticeable decline in offered interest rates. The 10-year NSC has been discontinued. Weighted average domestic term deposit rates (WADTDR) of the SCBs were 8.77 per cent in 2013-14 which gradually declined to 5.51 per cent in 2022-23 with slight improvement to 6.44 per cent in 2024, but still lower than in the initial period.

Losing purchasing power

Inflation trends show high pressure of prices in the last decade. Except 2017-18 and 2018-19, the inflation rate has been more than 4 per cent. Urban inflation was more than 5.40 per cent for almost half of the decade, with urban households contributing significantly to aggregate household savings. Barring 2023-24, overall inflation since 2020-21 has been hovering around 6 per cent, causing negative returns on demand deposits and negative or low returns on TDs.

Savings account holders are facing serious erosion in their purchasing power. The net returns (interest rate minus inflation rate) on all kinds of domestic savings were negative during 2020-21 and 2021-22. However, even after the increase in interest rates in 2023 and 2024, the returns on savings deposits are still in high negative levels, while in other categories of deposits, the returns are marginally positive but less than the 2014-15 level (Table 3).

The situation worsens once the tax is charged on this earned interest income (positive/negative). Assuming an interest rate of 4 per cent, then, the effective interest rate will be 3.60 per cent for those in 10 per cent tax slab; 3.20 per cent, for 20 per cent tax slab; and 2.80 per cent, for 30 per cent tax slab.

Expectations

The upcoming Budget needs to have measures that incentivise people to save. The interest income on all deposits (demand and time) less than five years may be made either tax-free or the interest income exemption limit may be extended. This will not only boost consumption expenditure but also increase supply of investible funds in the market.

Maurya is Assistant Professor of Applied Economics at Lucknow University, and Shrivastav is Assistant Director at NILERD, Delhi. Views expressed are personal

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