“The recession and inflation over the last year and more has broken the middle class and crushed low income groups,” says B.D Sharma, a retired director of public relations with the Himachal Pradesh government. “Whatever I and my wife, who also retired from a government job, had invested in a Fixed Deposited (FD) scheme,” says Sharma. “The regular interest income from this has dropped by 45 to 50% due to cut in interest rates, but our monthly household budget is up by 120%!”
Urban families, especially in towns like Shimla, a hill town known even during pre-pandemic times for its high cost of living, are now finding it even more difficult to make ends meet. “Governments, whether the centre or the states, are unconcerned about it” says Sharma.
For people like Sharma living on a fixed pension or interest income, life has never been as tough as it is today. Though his monthly earnings while in service were less than the pension he is drawing (approximately Rs 70,000 pm), he was able to manage his home, give his daughters a good education and build a house in Shimla. But galloping inflation post the pandemic and no new income flow has led to Sharma’s retirement plans going completely haywire.
“Monthly ration bills up from Rs 12,000 to Rs 20,000”
The story of the Dogra family is no different from that of Sharma. A father of three, Madan Dogra, residing next to the Himachal Pradesh university campus retired in 2012 after working as a driver in a government PSU for many years. Barring the lump sum that he received on his retirement, Dogra gets no pension as PSUs in HP are not covered under the pension scheme. His working wife had also retired three years back.
Dogra particularly feels the pinch of inflation, which has hugely increased his essential home expenses. One of his two daughters is getting coaching for her UPSC exams at Chandigarh. Whatever savings the couple had was invested in rebuilding their old house and meeting other liabilities to raise three children. The family is deeply worried about the future given the rising inflation numbers which could worsen further.
“We have shops near our home which we have rented out,” says Dogra. “But the income of the tenants, who are tailors, has also been hit by the lockdown and are unable to pay rent. Prices of essential items like pulses, vegetables, fruits, edible oil and petrol are skyrocketing. Our monthly household and ration bill is up from Rs 12,000 to Rs 20,000” says Swati Dogra, the elder daughter.
Such tales of misery among urban families, especially among the urban poor and retirees dependent on a fixed pension or FD interest, are aplenty these days. Job losses and salary cuts have made matters worse, especially for career-driven young people. Many had returned home after being laid off by big and small employers in towns like Gurugram, Noida, Pune, Bengaluru, Chennai, Hyderabad and Mumbai.
Slashing food expenses
The only way to cope, for most such urban families, has been to slash expenditure on food. Many families in Jammu, for instance, say they have stopped cooking Rajmah, a favourite dish, after its rates doubled. They have stopped consuming delicacies because of the high cost of cooking oils, spices and pulses. For these families, online orders have become a dream.
Meenu Kalotra, a home maker at Jammu’s posh Nanak Nagar, says the family’s earning from their business has remained the same while cost of living has gone up by 80% due to inflation. “Not just petrol price, but prices of cooking oils like mustard oil and refined oil have seen a 100% price rise,” says Meenu. “ We also have to sustain four-five families of our workers. We provide them home cooked food. All this has raised our costs at a time when returns from our business have been disrupted.”
The biggest blow to urban families is the gross decline in household savings due to inflation. “My wife was crying when she came to know that interest rate on MIS scheme, which was considered the most beneficial for employees, had been cut by more than 30%,” says Sharma. “She is worried whether their saving will see them through difficult days.”
That is the main fear among most senior citizens and pensioners, not to mention daily wage workers and other urban poor workers. Whether their savings will enable them to survive when they fall sick or to fulfil other family responsibilities like educating children.
“Most urban residents are wage and salary earners,” says Sachin Shridhar, a retired IPS officer and entrepreneur. “Recession essentially slows down the economic engine thereby curtailing job growth. With the economy not growing, it not only reduces earnings but also affects increments and career growth”.
Inflation, adds Sridhar, also means money losing its value when essential commodities get more expensive. “For all fixed income groups, it means lesser purchasing power in their hand. They are forced to cut down on discretionary spending and are unable to create a hedge for the future.”
Hunger Watch, an organisation of social groups, in a study last year found that the lockdown in March 2020 reduced urban incomes by 25 to 50%.
Asha Kumari, a six-time MLA and former minister in Himachal Pradesh, says COVID-led recession has pushed 3.1 crore families to the BPL category. “About 40% of the urban Indian population falls under the category of middle class, which translates to 19.24 crore people,” says Kumari.
“It is this middle class which is the backbone of the Indian economy,” says Kumari. “This recession has made people jobless and adversely affected their purchasing power”.
Rising inflation has a three-fold effect on all urban families, particularly pensioners. One, the abrupt and sharp cut in interest rates on income saving schemes without any corresponding relief on EMIs for loans, especially for housing.
Heading towards depression
“Galloping inflation or hyperinflation is rapid growth of inflation in which money loses its value to a point where alternative mediums of exchange e.g. barter or foreign currency are commonly used”, says D K Sharma, former advisor (Planning) in Himachal Pradesh government.
Recession, he maintains, is an imprecise term given to a sharp slowdown in the rate of economic growth. This is distinct from a depression which is a more severe and prolonged downturn. Recessions are a feature of business cycles. Two successive declines in seasonally adjusted, quarterly real GDP would constitute a recession.
“Hyperinflation means abnormally high price increases and recession means slowdown of the economy in real terms and when put together, would bad hit people with fixed incomes,” explains Sharma. “The impact would be harsher on senior citizens whose healthcare and dietary expenses are bound to rise with age. The situation would drain their savings apart from vapourising their fixed incomes”.
Devinder Sharma, distinguished food and policy analyst, draws a parallel between recession and depression to describe the sufferings of middle class urban families. “Recession is when your neighbour loses his job, depression is when you lose yours,” says Devinder Sharma. “I think we are gradually moving from recession to depression”.
The second wave has affected the economic status of nearly 97% of the population, as a recent CMIE study says. The worst hit are those whose livelihoods have been totally disrupted. And these families are predominantly from low income groups. “But now even the middle class is suffering”.
Interest rates, inflation and you
What banks offer: Most banks gives 5.4-5.5% on 5-10-year FDs. Taking rising inflation into account (6.3% for May), your actual returns on fixed deposits are likely to be minus 0.8-0.9%.
For senior citizens too actual returns are likely to be zero even though some banks offer 6.2-6.3%, for the same tenure.
How high inflation impacts return on savings: Say you have invested Rs 60 lakh in an FD and the interest on this is the only income you have for monthly expenses. Interest rate of 5.5% will amount to a monthly interest incme of around Rs 28,000. Actual amount will vary slightly depending on whether you choose the yearly or monthly returns option.
When inflation was lower, before the second wave hit, the interest income would mostly have been sufficient to meet monthly expenses. But at 6.3% inflation, expenses will rise by around Rs 1700 per month.
What are your options: For senior citizens, choosing schemes, like Senior Citizen Savings Scheme which offers 7.4% interest with a quarterly payout may offer a little comfort. Another scheme, the Pradhan Mantri Vaya Vandana Yojana, offers 7.4%-7.66%, depending on the payout schedule.
If you are looking for safer fixed income investments, Reserve Bank of India’s floating rate bonds which gives 7.15% interest at present can be considered. However, the rates change twice a year (on January 1st and July 1st).
Post office time deposit offers 6.7% interest rates on five-year deposits, where the interest is paid is once a year.
Among fixed deposit, investors can consider putting their money in non-banking financial companies (NBFCs) and small finance banks offering between 6.5 to 6.65% varying on time frame.
A few other small finance banks offer between 6.5% and 7% on FDs, with senior citizens in all schemes getting 0.25%-0.5% higher.
What the state should do, but is not doing
All the experts we spoke to say that it is the duty of the state to step in, to help build livelihoods, to provide jobs and to pump in economic stimulus that helps create demand. It is time the government prints surplus money and pumps it into the system taking care that the stimulus goes to the people, they argued.
In 2020-21, central banks in rich countries printed a surplus of $9 trillion, but even that was not enough to revive their economies. India too had printed Rs 1 lakh crore surplus, under the government Securities Acquisition Programme, which was mainly used by big investors to buy back bonds, says Devinder Sharma.
Sharma’s solution is that the surplus money printed should go partly for providing salaries to those laid-off, provide for COVID-19 healthcare and provide for direct benefit transfer to the bank accounts of the poor.
The second solution Sharma suggests is that “the time has come to reverse the economic thinking and move to a new normal”. He underlines the need for a policy thrust to ensure that rural people don’t end up as cheap workers in cities. “Agriculture needs a policy correction to keep a large section of the population gainfully employed”.
Sridhar offers a more radical solution, abolition of income tax completely for one year. “This will not make a huge difference as income tax contributes just Rs 2 lakh crore annually,” argues Sridhar. “Experiments the world over have proved that giving money in peoples’ hands works better than providing economic packages. Direct money gives people the freedom to spend the money wherever they want”.
Another way to stimulate demand is to lower interest rates on loans by at least 1%. “This will also bring liquid money into the market and the economy will revive,” says Sridhar.
In the end, the most urgent need is policy measures to protect household savings and ensure an assured minimum monthly income. And the only way to do this is by revising interest rates, especially on small savings, so that inflation doesn’t eat away all their hard-earned money.