Inflation- Indexed Bonds for Senior Citizens – S.S.Tarapore

It is recognized that inflation devastates Senior Citizens the most as they have no protection against inflation. A small proportion of the working population is covered by some kind of cost of living adjustments but the majority is defenseless against the scourge of inflation. Senior Citizens depend on the earning from their meagre savings. When the real value of their savings is eroded, they have nowhere to go. A Senior Citizens Savings Scheme is presently available, under which a deposit is placed with the government for five years at an interest rate of 9 per cent per annum, for a maximum amount of Rs 15, lakh. Let us assume that the average inflation rate is 7 per cent per annum. Since Senior Citizens can avail of this facility at the age of 60 years, by the time he is 65 years old a capital sum of Rs 100, in real terms, is reduced to Rs 71 and at age 70 the capital, in real terms, would be only Rs 51. If the Senior Citizen lives till the age of 75 years, the real value of the capital is reduced to Rs 36. No wonder Senior Citizens are very quickly reduced to penury. An amount of Rs 15 lakh, at 9 per cent per annum would generate an annual income of Rs 135,000 or Rs 11250 per month. At today’s cost of living this is by no means a luxurious income. Moreover, with inflation at 7 per cent per annum the Senior Citizen earns a return of only 2 per cent in real terms; in other words, in real terms, the Senior Citizen’s income is even lower. The issue of an Indexed Bond has been discussed in India for over 15 years. In the 1990s, an excellent study by the Reserve Bank of India (RBI) Development Research Group ( DRG) was prepared by Dr. Vikas Chitre and others. While this was examined by the government, one of the top policy advisers of the government shot down the proposal as he believed that the authorities would not be able to contain inflation and, as such, the Indexed Bond would be very costly for the government. In addition, it was felt that such a scheme would be infectious and indexation would become all pervasive. The bogey was raised that the Indian authorities could fall into a situation akin to the Italian Scala Mobile  (sliding scale inflation adjustment) in the 1970s and 1980s under which everything was indexed and this generated massive inflation. The issue of an Indexed Bond was revived, in India, in 2003 under which there was to be an Indexed Bond called the Dada- Dadi Bond ( note the gender bias!). With the change in the Central Government in 2004, this proposal was given a quiet burial. It is paradoxical that government economic policy Pundits recognize the need for inflation adjustment for employees of Central and State Governments, public sector units and the corporate sector yet they express grave concerns if Senior Citizens are protected. Some policymakers have rightly diagnosed that India may have shifted from the earlier norm of a tolerable rate of inflation of 5 per cent per annum to a new norm of 7 per cent per annum. Pious pronouncements are made by policymakers that inflation must be controlled but this is tempered by the strongly held view that anti- inflationary policies should not affect growth. If an enduring high rate of growth is the objective this can only be attained under a regime of low inflation rates. To hope that high growth rates would be sustained without strong anti- inflationary policies is wishful thinking. How should Indexed Bonds operate? Experts rightly argue that if the real rate of interest is higher than the real rate of growth of the economy, the growth rate will fall. Almost all macroeconomic projections point to a medium- term growth of the economy of 8 per cent plus. It is nobody’s case that the Index Bond should carry an assured 8 per cent real rate of interest. As a starter, it would suffice if we provide for a 4 per cent real rate of interest, which would be very modest in the context of an average real rate of growth of 8 per cent. Like the present Senior Citizens Savings Scheme, the Inflation Indexed Bond should have an investment ceiling of Rs 15 lakh. The inflation adjustment could be done on the basis of the inflation rate in the previous year. If the real rate of interest on the Indexed Bond is 4 per cent and the inflation rate is 7 per cent the bond holder would be paid a rate of 11 per cent. If the inflation rate is say 4 per cent the Bond holder will receive 8 per cent. It would be necessary to specify the specific inflation index i. e. the Wholesale Price Index (WPI) or the Consumer Price Index ( CPI). If the inflation rate averages 7 per cent, on maturity the Bond holder should receive Rs 140 for an initial investment of Rs 100. In other words, the Bond holder should be protected for both the income stream as also the capital value of the investment. An Inflation Indexed Bond would be a strong assertion by the authorities of their intention to bring about an enduring reduction in the inflation rate. Such a scheme would be a strong incentive for the government to bring down inflation. Denying Senior Citizens protection against inflation would not be reflective of a caring society. The time has come for the government to bite the bullet and introduce an Inflation Indexed Bond for Senior Citizens.
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