Budget: A let-down for small investor

By C. R. L. Narasimhan

How has the budget treated the small investor? Of the several high profile responses to the budget proposals, very few had anything to say on its impact on the common investor. Even granting that there could be a definition problem here - after all small investors cannot be easily fitted into a neat legal or regulatory definition - the absence of concern for the category of investors, depositors and savers can only be explained by the fact that the latter do not have spokespersons unlike organised industry. Yet, this large category of savers matter. In the stock market context, for instance, it has long been realised that the flight of the small investors from the primary market almost brought about its extinction and that their absence from the secondary market is a principal cause of its volatility.

In a macroeconomic sense the important role of the household sector - roughly synonymous with the individual savings class - in the total savings and investment of the country is readily understood.

The Economic Survey that preceded the budget announcement by a few days had recorded a sharp decline in gross domestic savings during 1998-99 to 22.3 per cent of the GDP from 24.7 per cent in the previous year. Although during the same period, the aggregate financial savings of the household sector went up slightly from 10.4 to 10.9 per cent of the GDP, the household savings in physical assets went down from 8.6 to 7.6 per cent. Altogether the private savings rate declined by one per cent of the GDP (which the Survey attributes to the higher consumption growth in 1998-99).

Along with the above concerns, the Finance Minister was expected to address the commonly understood problems of the savings class. These can fairly easily be spelt out. Concern over falling yields is a major issue. Safety of deposits is another.

The need for greater investor education at a time when the financial sector is taking on strong technical characteristics is yet another. Since the Finance Minister's budget speech has by now come to be recognised as a broad economic statement of which the traditional expenditure and income statements are merely the most visible parts, did Mr. Yeshwant Sinha meet the expectations of the savings class ?

The disappointment of the stock market was obvious but then stock price movements are not representative of small investors' feelings leave alone those of any larger body of savers.

The threat of a lower yield on savings is real. The one percent reduction in the rate on General Provident Fund announced during the budget comes after a similar reduction in the PPF and small savings schemes of the NSO. Popular though unfounded opinion has it that these are meant to signal a lower interest rate regime. While after the budget the usual clamour for reduced interest rates has become shriller ,experts say that the interest rate cuts in PPF/GPF are meant to correct structural rigidities. The true signalling device would be a bank rate reduction by the Reserve Bank of India.

Whether that happens soon or not is besides the point. Policy should immediately address the genuine apprehensions of many sections of the society which depend upon the monthly interest from a bank, NBFC, post-office or a mutual fund.

These sections are also the most vulnerable. Far from providing a safety net to them, whatever comfort they have had is being stripped away:

(1) The collapse of the NBFCs along with large-scale failures in ``plantation'' schemes, nidhis, has very serious implications , which are often glossed over. It is essential to build reliable data on the extent of investors' loss. Mr. Sinha has promised an investor protection legislation for the NBFC depositors.

This is certainly a question of too little too late. Besides , it is necessary to pinpoint the failings of the existing machinery - Company Law Board and all - which have thoroughly disappointed thousands of depositors.

(2) Banks offer a pittance on their deposit schemes especially in the shorter periods. This coupled with indifferent customer service makes them a less favourable option. Besides, the drive towards a lower interest rate regime will cause most public sector banks to lower their deposit rates (though not perhaps their lending rates).

(3) The mutual funds, boosted by large tax concessions last year came as a whiff of fresh air to many depositors. Those that gave monthly or quarterly return - by investing the funds garnered by them in debt instruments - became popular. Such has been their magnitude of success that many of them have been unable to cope with the inflows.

Their after-sales service has suffered. Mr. Sinha has now proposed a doubling of the tax on dividends paid by these debt funds. Obviously the adverse impact will be on the average investor. Mutual funds, especially those offering debt schemes will become less popular but one is not sure where the investor preferences would be. Or do they have a choice at all?

Send this article to Friends by E-Mail

Section  : Business
Previous : IT stocks under correction
Next     : Govts. borrowing from RBI up