Rates, Policy Props Moving In Favour Of Senior Citizens In A Young Indian Demographic

The interest rate structure in any country is not age-neutral. If we assume that younger people borrow more than they save (for homes, two-wheelers, cars), and older people invest more than they consume, it follows that a rising interest rate regime is better for the old than the young and working age population.

The Union Budget provided a bonanza for senior citizens in terms of tax breaks, annuities and medical insurance, while leaving out the vast bulk of India’s working age population, which constitutes 66 per cent of the demographic.

Among other things, the budget exempted interest income from bank deposits and post office schemes upto Rs 50,000 for senior citizens, increased tax-deductible medical insurance premia to Rs 50,000, and doubled the investment amount in the Vaya Vandana scheme to Rs 15 lakh – the same as the Senior Citizens’ Saving Scheme run by post offices. While Vaya Vandana pays 8 per cent, the SCSS pays 8.3 per cent, both taxable.

In contrast, thanks to rising inflation, the interest rate environment is moving against borrowers, most of whom will be in the 25-55 age group.

The Reserve Bank and the Monetary Policy Committee goofed up last year when they prematurely put a stop to rate cuts, and now the consensus is that rates have bottomed out. No matter what the MPC does today, the market has already moved up. Around mid-morning on 7 February, the 10-year government bond was quoting at 7.57 per cent, more than 1 per cent up from levels in mid-2017.

The new long-term capital gains tax (LTCG) introduced in the budget is a move towards balancing taxation of various asset classes, but if we assume that younger people will be investing more in equity than debt, the tax impacts them more than senior citizens. Clearly, LTCG needs to be indexed to inflation.

Perhaps, the government believes that the interest rate subventions offered for affordable housing last year will benefit the young, but most of the affordable housing projects tend to be far away from workplaces. So while one does end up owning a home at lower cost, commuting costs tend to be higher.

And if, in the coming months, interest rates move higher, the skew against the working age population will worsen.