New Delhi: It isn’t only mutual funds and non-banking financial companies that are facing redemption pressure. The government-run Public Provident Fund (PPF)—the single-largest fixed-income scheme in the country—has also suddenly registered a spurt in withdrawals. PPF deposits have shrunk by over Rs 6,700 crore in September alone. Contrast this with the deposit inflow of Rs 5,072.39 crore for the first five months of this fiscal.
As a result of the massive withdrawal, the year’s PPF corpus stands at (-)Rs 1,766.10 crore, according to the latest controller general of accounts data. The PPF is one of the best indicators of household savings trends. It is also the most robust long-term savings instrument in the economy with a 15-year tenure; its ease of liquidity, unlike term insurance plans, makes it a favourite with the middle class.
The huge PPF redemptions are in line with the flight from all other financial sector investments. Investors are battling high interest rates on housing, automobiles and credit cards that have eaten into their consumption baskets. The withdrawal reflects the scramble to avoid payment defaults on monthly instalments. The meltdown in capital markets has further added to the pressures on the overall savings basket of the middle class.
The Prime Minister’s Economic Advisory Council has also noted that savings were expected to decline to 34.5% in the current fiscal. “Consequently, for the first time in recent years, the overall savings rate will be significantly lower than the investment rate,” the EAC’s Economic Outlook for 2008-09 says.
“It appears counter-intuitive. This is probably the worst time to take money out of the PPF,” says Rajesh Chakrabarti, assistant professor of finance, Indian School of Business. “There could be a liquidity squeeze at the retail level and people are withdrawing funds to meets their immediate needs.”
“Given that inflation is at 10.7%, the PPF actually offers a negative rate of interest at 8%, tax free. Also, banks are offering much higher interest rates on fixed deposits and so the incentive to hold money in PPF is not very strong,” points out DK Srivastava, director, Madras School of Economics.
At a macro level, this could be good news for the government. The Centre has to use up to 20% of the receipts from small savings, the rest going to the states. States are entitled to use 100% of the receipts from 2003-04, but as interest rates on government paper sank lower than the PPF rate, they have asked for a switch. Throughout 2008-09, the Centre is also raising money at less than 8% on its bonds—the benchmark ten-year 2018 paper has a coupon rate of just 8.24% with the yields at 7.71% as on November 6.
The rapid intra-year parking and withdrawal from the PPF means the fund has possibly lost its role as a long-term investment avenue. For instance, April saw a combination of high inflation and poor market conditions, a record Rs 5,051.49 crore was invested into the fund. This was unusual, as April, according to CGA data, has always seen huge redemptions. In 2006-07, Rs 2,313.57 crore was withdrawn from the fund in April.
The finance ministry estimates total deposits in PPF to exceed Rs 12,200 crore for 2008-09, in sharp contrast to last fiscal, when total collections in the fund was half of that at Rs 6,329 crore.
Other government-backed small saving schemes such as the Post Office Savings Account, National Savings Certificates and Kisan Vikas Patra have already been losing investors. Up to September, such schemes registered a net outflow of Rs 3,083.62 crore. With a similar lacklustre performance last fiscal, the full-year target of Rs 41,100 crore was not met. The Budget estimate for 2008-09 was scaled down to Rs 17,800 crore.
The slump in investor interest in such schemes is despite the fact that the government has introduced added incentives. The five-year post office time deposits and Senior Citizens’ Saving Scheme, for instance, has now been included under Section 80C for tax exemption. Similarly, the government has also announced a 5% bonus on the Post Office Monthly Income Scheme.
