With Due Apologies to Pensioners

This appeared in Financial Express on 13th December, 2017 http://www.financialexpress.com/opinion/myths-on-pensioners-busted-check-out-the-real-and-false-arguments/971509/

Inflation Proofing Pensioners – the real and the false arguments

V Kumaraswamy

Our tight inflation targeting in the last 6-7 years are sought to be justified on (i) stable prices being a pre-requite for sustained growth and (ii) that pensioners who largely on interest income should be protected. Such targeting is being achieved by RBI through higher interest rates regime. Similar argument is advanced against correcting our over valued currency.

That the pensioners have suffered in the last few years and will suffer heavily if we loosen controls on interest is a big myth at this point in time when coming out of low growth inertia and near nil new employment creation seems so vital.

Have they suffered in recent times?

The main argument is that the pensioners with fixed income will suffer capital erosion through inflation and will have less and less real capital base to earn their future incomes. If interest income remains constant but expenditure keeps going up year on year due to inflation, progressively they will be left with smaller amounts to consume.

Table 1 clearly shows that this argument is clearly overdone in the last 4-5 years. Ever since the 4% CPI inflation target has been articulated and rather doggedly pursued by maintaining higher interest rates, inflation has fallen steeply whereas the interest rates have not traced the same trajectory.

From 2005-06 till 2011-12, the interest on Bank Term deposits were 1.5% more than the WPI inflation and 0.7% less than Consumer Price inflation. Since then, interest earners have had it good and the interest rates have been more than both – by a whopping 5.6% over WPI and 1.5% over Consumer Inflation.


Table 1: Interest Rates and Inflation – Pre & Post 2012
Period WPI Inflation @ Inflation Consumer Prices # Interest on Term deposits @
Ave 2005-06 to  2011-12 6.6 8.8 8.1
Ave since 2011-12 2.3 6.4 7.9

Source: @ from RBI; # from World Development Indicators.

But why the all-round feeling of being left out by the Pensioners now as the social media would have us believe when in real terms their income is 3 times compared to the period before 2012. In the years since 1991 except for a brief period between 1998 to 2002 asset prices have always been going up, in many years faster than inflation. When there is asset price inflation there is the wealth effect which makes us feel wealthier and prone to spending more, as articulated by economists. But once again in the last 3 years, real estate prices have hardly gone up. Without this illusory wealth effect backing, pensioners may be feeling poorer off.

Class of Interest Earners and Pensioners

People in agriculture tilling the land are unlikely to be living on interest income. They till as long as they can and then reply on family as the social security net on reverse mortgage of sorts – family supports them on the understanding that on death, his property will pass onto them. This is 50-60% of rural population. Landless labour are unlikely to be hit due to interest rate variations; they would need a safety net of a different kind. Non- farm rural labour is unlikely to be living off bank deposits.

People who are largely living on interest income are most likely urban or middle class. Most of them hedge their bets and have houses, gold etc. as safety nets and only a portion of their savings is in interest bearing instruments.

Amongst these are retired Government employees, whose pension is adjusted for inflation from time to time if they have been in service before 2004. They are a substantial proportion among pensioners. Those who joined after 2004 are unlikely to have retired by now.  Those who are most likely sufferers are those who retired from private service. Let’s see what proportion these are.

The total term and savings deposits of the banking system as of Sept 2017 is about Rs 114 lac crores and with the MF, Small savings and Public deposits it would be about Rs 130-135 lac crores, which is about 80% of our GDP. The comparative figures for US is more than 150%.  At an average rate of 6.6% this would give an income of Rs 8.91 lac crores or 5.5% of GDP.

From the above, we have to deduct the interest accruing to people still in service and Government pensioners. The income accruing to those who are surviving on interest alone is likely to be less than 2% of population.

Effect of Currency Devaluation

One of the strident and stubborn arguments against correction of our overvalued currency is that it will lead to inflation and hurt the interest of pensioners. The Urjit Patel Committee has summarised the several studies (see Table 2) on India estimating the inflation over the short term and the long term from a 10% movement in Rupee versus USD. With the singular exception of Ghosh and Rajan, the resultant incremental inflation (from currency alone) is likely to be 0.6% in the short term to about 1.5% over the long term. This is hardly worth the scare given the real income of pensioners have risen 3 times since 2012.


Table 2: Impact from 10% Depreciation of Re vs US $
Author Period Covered Short Term Inflation Long Term inflation
Khundrakpam (2007) 1991 – 2005 0.5% in WPI 0.90%
Kapur and Behera (2012) 1996 – 2011 0.6% in WPI 1.20%
Patra and Kapur (2010) 1996 – 2009 0.5% in one qtr WPI 1.5% in 7 qtrs
Patra et al (2013) 1999 – 2013 1.5% before 2008 crisis 1% after Crisis – WPI
Ghosh and Rajan (2007) 1980 – 2006 4.5%  to 5% in CPI  
Bhattacharya et al (2008) 1997 – 2007 1% – 1.1% in CPI 0.4% to 1.7% in CPI
Source: RBI – Urjit Patel Committee Report


Pensioners Vs Job Seekers 

Should our monetary system be so sensitive to such a small proportion of GDP and the group of people behind that (less than 2%). A 2-3% drop in interest rate in line with inflation would help the investment climate substantially especially in utilising capacities lying idle. The number of new job seekers is about 0.75 – 1% of total population each year.  For years on end the job creation has suffered and they will far outnumber Pensioners and its time their aspirations are also met.

Deposits till death.

If term deposit interest rates spread inflation had been same post 2012 (as between 2005/6 to 2012), Banks would be now saving Rs 164,000 crores on the incremental deposits of Rs 40-odd lac crores. If similar reduction had accrued on Central Government’s net additional borrowings, it would be an additional Rs 74,000 crores. These amounts saved would be sufficient to take care of those who purely depend on interest for survival.

The real sufferers can be taken care of by special deposits which can yield 2 % over CPI inflation s.t minimum of 5%. The deposits can be on joint names of spouses and on death of the latter to die, the deposits can be given over to the designated nominees after deducting tax. If prematurely withdrawn by depositors, the interest can be recalculated as per past prevailing interest rates and the balance of deposit paid to the depositor. Those who are entirely dependent on interest alone could be easily taken care through this mechanism from the potential savings as earlier estimated.

The writer if CFO of JK Paper and Author of Making Growth Happen in India (Sage).   


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