Everybody Loves a Good Interest Rate Cut…Except the Savers

My main life lesson from investing: self-interest is the most powerful force on earth, and can get people to embrace and defend almost anything – Jesse Livermore.

Late in the evening of March 31, the department of economic affairs, ministry of finance, put out a press release saying that the interest rates on small savings schemes for the period April to June 2021, have been cut.

The social media got buzzing immediately. And almost everyone from journalists to economists to analysts praised the decision. It was seen as yet another effort by the government to push down interest rates further.

With the state of the economy being where it is, lower interest rates are expected to perk up economic growth. People are expected to borrow and spend more. Corporates are expected to borrow and expand. At lower interest rates individuals who have already taken on loans will see their EMIs go down, leaving more cash in hand, and they are likely to spend that money, helping the economy grow.

That’s how it is expected to work, at least in theory. Hence, everybody loves a good interest rate cut… except the savers.

On April 1, the social media woke up to the finance minister Nirmala Sitharaman’s tweet announcing that “interest rates of small savings schemes… shall continue to be at the rates which existed in the last quarter of 2020-2021.” She further said that the order had been issued by oversight and would be withdrawn.

Later in the day, the department of economic affairs put out a press release to that effect.

The fact that lower interest rates are good for the economy is only one side of the story. They also hurt the economy in different ways. People who are dependent on interest income for their expenditure (like the retired senior citizens) see their incomes fall and have to cut down on their expenditure. This impacts private consumption negatively. 

While this cannot be measured exactly, it does happen. Also, a bulk of India’s household savings (close to 84% in 2019-20) are made in fixed deposits, provident and pension funds, life insurance policies and small savings schemes. Lower interest rates bring down the returns of all these products and this negatively impacts many savers.

As the economist Michael Pettis writes about the relationship between interest rate and consumption in case of China, in The Great Rebalancing:

“Most Chinese savings, at least until recently, have been in the form of bank deposits…Chinese households, in other words, should feel richer when the deposit rate rises and poorer when it declines, in which case rising rates should be associated with rising, not declining, consumption.”

The same logic applies to India as well, with lower interest rates being associated with declining consumption, at least for a section of the population.

This is not to say that interest rates should be higher than they currently are (that is a topic for another day), nonetheless the fact that lower interest rates impact savers and consumption negatively is a point that needs to be made and it rarely gets made. I made this point in a piece I wrote for livemint.com, yesterday. 

Also, borrowing is not just about lower interest rates. It is more about the confidence that the borrower has in his economic future and the ability to keep paying the EMI over the years. I wrote about this in the context of home loans, a few days back.

This leaves us with the question that why doesn’t anyone talk about the negative side of low interest rates. The answer lies in the fact that they don’t have an incentive to do so. Let’s try and look at this in some detail.

1) Fund managers: Fund managers love lower interest rates because it leads a section of the savers, in the hope of earning a higher return, to move their savings from bank fixed deposits to mutual funds and portfolio management services which invest in stocks. In the process, their assets under management go up. More money coming into the stock market also tends to push up stock prices.

All in all, this ensures that fund managers increase their chances of making more money and hence, they love lower interest rates because their acche din continue.

2) Analysts: Analysts love lower interest rates because it leads a section of the savers, in the hope of earning a higher return, to move their savings from bank fixed deposits to stocks. In order to buy stocks, they need to open a demat account with a brokerage. When the new investors buy stocks, the brokerage earns commissions.

Further, it also means that the interest cost borne by corporates on their debt goes down, leading to higher profits. The stock market factors this in and stock prices go up. Given this, analysts have an incentive to love interest rate cuts.

3) Corporates: Do I need to explain this? Lower interest rates lead to a lower interest outflow on debt that a corporate has taken on and hence, higher profits or lower losses for that matter. This explains why corporate honchos are perpetually asking the Reserve Bank of India to cut the repo rate or the interest rate at which it lends to banks.

4) Banks: Banks love lower interest rates simply because at lower interest rates the value of the government bonds they hold goes up. Interest rates and bond prices are inversely related. Higher bond prices mean higher profits for banks or lower losses in case of a few public sector banks. This is why bankers almost always come out in support of interest rate cuts.

This also explains why the bankers hate the idea of small savings schemes offering higher returns than fixed deposits. Lower interest rates on small savings schemes pushes the overall interest rates in the financial system downwards. 

5) Economists: Most economists are employed by stock brokerages, mutual funds, banks, corporates or think tanks. As explained above, stock brokerages, mutual funds, banks and corporates, all benefit from lower interest rates. If your employer benefits from something, you also benefit in the process. Hence, your views are in line with that.

When it comes to think tanks, many are in the business of manufacturing consent for corporates. Their economists act accordingly. 

6) Journalists: With the media being dependent on corporate advertising as it is, it is hardly surprising that most journalists love interest rate cuts. Further, the main job of anchors on business news channels is to keep people interested in the stock market because that is what brings in advertising. And this can only happen, if stock prices keep going up. In this environment, anything, like interest rate cuts, that drives up stock prices, is welcomed.

Of course, some mainstream TV news channels also run propaganda for the government. So, in their case every government decision needs to be justified. That is their incentive to remain in the good books of the government.

7) Government: The central government will end up borrowing close to Rs 25 lakh crore during 2020-21 and 2021-22. Hence, even a 1% fall in the interest rate at which it borrows, will help it save Rs 25,000 crore. It clearly has an incentive in loving low interest rates. 

The point is everyone mentioned above tends to benefit if interest rates keep going down or continue to remain low. Further, they are organised special interests with direct access to the mainstream media. The savers though many more in number aren’t organised to put forward their point of view.

Also, it is easier to do the math around the benefits of interest rate cuts and low interest rates than its flip side. As economist Friedrich Hayek said in his Nobel Prize winning lecture, there is a tendency to simply disregard those factors which “cannot be confirmed by quantitative evidence” and after having done that to “thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.”

That’s the long and the short of it. 

Mumbai Mirror Shutting Down and the Screwed Up Business Model of India Media

Alibaba mil gaya chaalis choron se – Anand Bakshi, Laxmikant-Pyarelal, Runa Laila, Aadesh Shrivastava and Mukul Anand, in Agneepath (1990).

There was a time when I bought and tried to read eight daily newspapers. Two things led to a change on this front. The first reason was very practical. Apartments in Mumbai are small and buying eight newspapers for six days a week (I took a break on Sundays), meant that the raddi accumulated very quickly and took up a lot of space.

The second reason was something I learnt from experience. Most news is just noise. Following noise helps if you are a news reporter because that is precisely your job. But if you are looking to understand the big picture and not miss the wood for the trees, as I was, it made sense to ignore most news that was published and train the mind to look at a few limited things which mattered. (Also, with the internet, one could always Google up the noise later, if the need arose).

This led to a massive cutdown in the newspaper buying habit. Also, around early 2007, I went fully digital, rarely buying physical copies. Hence, I have been reading e-papers now for close to fourteen years. Of course, unlike earlier, I seriously read only two newspapers (on most days) and sort of flip through a third one. And now one of the newspapers which I read seriously, Mumbai Mirror, is shutting down.

This development has made me take a look at the economics of the Indian media, newspapers and digital, in particular. TV news is an entirely different beast, which I do not understand well enough to be writing about. I will also look at the entire issue from the point of view of readers and try to explain why things have become very tricky.
Let’s take a look at the issue pointwise.

1) Indian newspapers, the way they have evolved over the years, have totally become advertisement driven. Depending on who you ask, you are likely to be told that the split between advertisement revenue and subscription revenue, is 80:20 or 90:10, for that matter.

The point being that the readers are not consumers for newspapers, but the product, which is sold to corporates who advertise. Now in a post-corona world, the advertisements in newspapers have come down. Mumbai Mirror used to have an edition of 36 pages on most days before the covid pandemic struck. After covid, the size of the edition barely went beyond 16-18 pages on most days.

Clearly, the newspaper hadn’t been getting enough advertisements, hence, the decision to shut it down. One can also speculate here that the sales of physical copies of newspapers have crashed post the pandemic and are nowhere near what they used to be (I mean newspapers in general here). That’s one reason to possibly explain the lack of advertisements in Mumbai Mirror.
Also, the main reason behind setting up Mumbai Mirror doesn’t exist anymore. The Times Group started the newspaper in 2005, to protect its prime brand, the Mumbai edition of The Times of India, from the Daily News and Analysis (DNA). The Mumbai edition of DNA was launched in July 2005. The other reason behind launching the Mumbai Mirror was to also protect Mumbai edition of The Times of India from The Hindustan Times, which launched a Mumbai edition in July 2005 as well.
DNA was shut down in October 2019, though the newspaper had been down in the dumps for close to a decade before that.

Given this, the Times Group, which looks at its publications not as news ventures but as products which solicit advertising, decided to cut down on its losses.

2) In the last couple of years, many media houses have put their epapers behind the paywall. Some media houses now offer only a certain number of articles per month free, beyond that the reader needs to subscribe (Honestly, there are very simple hacks available to get around this).

While, this might be a sensible thing to do, the chances of it working out quickly are very low. The Western newspapers which have been successful in raising a substantial portion of their revenues digitally, have been at it for almost two decades. Off the record conversations with a few higherups in the newspaper space tell me that digital doesn’t bring in much money currently.

Also, a lot of the digital strategy of the Indian news media is all over the place. Like in the recent past, almost everybody has launched podcasts, without having the most basic infrastructure in place. The recordings of many of these podcasts are absolutely terrible (There are podcasts out there whose production values are superb as well, but that is more an exception which proves the rule). Of course, very few of these podcasts, like most of the digital media, earn any money. They have been launched because everyone else has also done so.

3) One of the theories that has been propounded in the recent past is that the media will survive and report the news that it should, only if the readers pay for the news they consume. Right now most news consumption is free.  Honestly, I have subscribed to this theory as well at some point of time.

But now I am very sceptical of this argument. Let me offer a few reasons for the same. With corporate advertising taking a beating, the news media as a whole is now dependent on government advertising more than ever before. Revenues from the digital media cannot fill the gap because of the fall in corporate advertising.

Hence, the media as a whole needs to keep government(s) in good humour, so that the advertisements keep coming in. Also, other than this economic incentive, the other reason is simple political pressure and the fact that any government has a lot of nuisance value. The current central government thrives on projecting narratives which it wants to and for that it needs the so-called national media on its side. This will stop the media from covering news items like they should.

To cut a long story short, just because you, dear reader, have bought an annual digital subscription which cost Rs 1,000-2,500, it doesn’t mean that the news media will start reporting news the way they should. Propaganda and spin will continue to be the order of the day.

4) Another phenomenon being seen is the rise of paid-newsletters. Some newsletters have achieved some scale and a few thousand paid subscribers. This is often offered as an example of how people are willing to pay for stuff which is written and presented well. While this is a good development, one needs to take into account the fact that the paid-newsletters are extremely niche with a large focus on the private equity, venture capital space, stock market investors etc.

At best they look at business and corporate stories. This doesn’t fulfil the need for the media being the fourth pillar in a democracy. A few thousand people paying for some news they consume isn’t going to help either the Indian media or the Indian democracy in any way, for that matter.

5) Another recent phenomenon has been that of out of work journalists starting their own newsletters and charging for it. While I have no specific idea of how well these newsletters are doing, I can tell you from my own experience that the point about at least 10% of your social media followers will end up paying for the newsletter, is a lot of bunkum. If you can get even 10% of your social media following to click on what you write, you will be doing a decent job of it, forget paying for the content.

6) Also, with newspapers and websites going behind a paywall, WhatsApp forwards and false news, will gain greater legitimacy as people will have easy access to them than genuine news.

As Alan Rusbridger writes in Breaking News – The Remaking of Journalism and Why It Matters Now: “Bad information [is] everywhere: good information [is] increasingly for smaller elites. It [is] harder for good information to compete on equal terms with bad.”

It is very easy to put out bad information out there on the social media, after the fixed cost of a mobile phone or a cheap laptop and an internet connection has been met. The marginal cost after the fixed cost has been met, is almost zero. Politicians and political parties will continue to thrive on this.

7) Where does all this leave news-media houses? A basic point that MBAs who run these organisations haven’t seem to have understood is that today’s reader doesn’t get his news from just one source like the old days, when most families subscribed to one newspaper or at best two newspapers and/or a weekly magazine.

Today’s reader likes to read from multiple sources, basically whatever he finds interesting enough and/or whatever gets shared with him on WhatsApp or social media. Media houses clearly haven’t caught up on this trend. They still want readers to make an upfront payment and commit to a subscription of at least one month.

It’s time that they started adopting micro-payments and pricing their digital stories for as low as five bucks and let people pay for it, if it interests them. Other than offering people choice, this will allow news media houses to tackle the subscription fatigue that will set in sooner rather than later.

It is important to remember here that news media is competing not just with other news media, it is also competing with over the top (OTT) media platforms like Hotstar, Amazon Prime, Netflix, SonLiv etc., for a share of the consumer’s wallet as well as his time and mind-space.

Other than Netflix, which is on the expensive side, the cost of subscribing to other OTTs is quite cheap. The news-media is competing with these OTT platforms as well.

7) Talking about competition, news media houses are now also competing with individual content creators, who have a strong presence on YouTube. Some of these content creators, who focus on delivering free as well as paywalled video content around the important news of the day and cut the clutter, have huge social media followings. Their business model rests around seeking donations from their followers. These donations can be as low as Rs 10. This makes another case for micropayments.

To conclude, common sense suggests that it will be easier to get people to pay for news digitally, if the amounts involved are small. As far as readers are concerned, there are no guarantees that they will get what they are looking for, even if they are ready to pay. One solution is to follow and support individuals like me who are trying to put out stuff they feel people should know about and which the mainstream media isn’t writing about. Nevertheless, the problem there is that there is only so much an individual can do and it is very difficult for individuals to be consistent day and day out.

Disclosure: I worked for the Daily News and Analysis (DNA) between October 2005 and September 2010. I also worked for the Times Group between October 2010 and March 2012.