A safety net for the middle-class?

By Alok Mukherjee

NEW DELHI, FEB. 24. As Mr. Yashwant Sinha prepares to present his fourth Budget in a row, there is a feeling growing among a section of the population that Mr. Sinha is more of a Finance Minister for trade and industry than for other segments of society.

During Mr. Sinha's tenure as Finance Minister, certain decisions have been taken which have gradually eroded the incomes of those not in the new economy segment - the general class of salaried persons, pensioners and the aged. With static incomes and total dependence on returns from savings and investment, these sections are gradually finding their returns dwindling and the general cost of living going up, even as the demonstration effect forces increased consumerism.

During the last few years, there has been a general decline in bank deposit rates. Returns on investments made in small savings have been lowered through administrative fiats and more than ample hints are coming from the Government that pension and provident fund interest rates will be further reduced. Now, the economic logic of lowering deposit rates in understandable. If the industry has to compete globally, it has to have access to finance at comparable rates which the foreign companies can get. Consequently, if lending rates are to be lowered, it is but natural that deposit rates have to be lowered too, because banks cannot give out more than they earn from their lendings (there has been an odd suggestion for subsidising the deposit rates but there are no serious takers for the suggestion as yet).

The lowering of the lending rates also suits the Government since it is the largest borrower. Therefore, a cut in the lending rate proportionately lowers the Government's interest burden, about Rs. 1 lakh crores already.

But this attempted integration with the global economy is hurting a large section of the population. With savings instruments losing their shine and other investment opportunities with company deposits and non-bank finance companies, in most cases, proving useless, there is very little one can do to provide for the proverbial ``rainy day''. Worse, investment schemes floated by reputed public sector financial companies in the recent past, are suddenly being terminated as many of them find it uneconomical to continue with the committed higher interest rates. True, the clause for early redemption was included in the fine print of the contract, but those who made these investments say 9-10 years back with their retirement or the marriage of a child in mind, suddenly find their plans going awry.

For many, the crisis perception is heightened by the fact that as of now, there are no proper and attractive insurance schemes which could be handy in case of say a medical emergency. The state of public sector healthcare being what it is, private treatment for any major health problem costs the earth. The point made by these people is that while integrating with the global economy might necessitate financial sector reforms, most of the developed countries also provide a welfare package to their citizens at reasonable cost. This welfare support is missing in India.

Going by the indications from the Government, things are likely to worsen rather than improve with the coming Budget. One, deposit rates on savings are likely to be lowered. At the same time, it seems people will have to pay more for services which have almost become necessities - be it the telephone, medical or legal services, courier services or even consultations with a chartered accountant for filing tax returns.

All these are already in or likely to be included in the service tax net and the rate is also proposed to be hiked. So, while paying for a telephone call made, one will also have to pay a higher tax for utilising this service.

Some citizen groups point out that with the Government officially identifying 26 per cent of the population of the country as poor and with estimates that the proportion of the rich could be between five and 10 per cent, the remaining 65-70 per cent of the so-called ``middle-class'' require a social safety net as the economy continues its march towards globalisation.

The question is whether Mr. Sinha will pay some attention to this aspect. His predecessors - Dr. Manmohan Singh and Mr P. Chidambaram - had made some movement in this direction. It is Mr. Sinha's turn now.

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