Small Savings: The Government’s Big Saviour?

Centre has been increasingly relying on small savings to finance fiscal deficit, albeit at slightly higher cost.

A man counts Indian rupee banknotes in an arranged photograph in Varanasi. 

(Photo courtesy: Dhiraj Singh/Bloomberg) 

Every paisa counts. That’s true for household budgets. It’s equally true for the government’s budget.

Faced with increasing demands on its limited resources, the central government has been increasingly relying on the pool of small savings to finance its fiscal deficit and also fund some of the needs of large public institutions. The financing, while well within permissible rules, comes at a slightly higher cost and could also add to the stickiness of interest rates in the economy, should small savings rates be kept high to ensure adequate inflows into small savings schemes.

This year, for instance, the government is likely to finance more than Rs 75,000 crore of its fiscal deficit from the National Small Savings Fund, according to budget projections. The actual financing via the NSSF could be higher. In late September, the government decided to cut market borrowings for the second half of the year. The shortfall, said Finance Secretary Subhash Garg, would be partly made up by increased financing through NSSF.

Last year, the government financed over Rs 1 lakh crore of its budget through small savings, accounting for over 17 percent of the total deficit. The quantum financed via the NSSF in 2017-18 was almost 50 percent higher than the previous year, shows data from budget documents.

(Source: Budget documents/receipts budget)

The central government got more room to borrow from the NSSF following recommendations of the Fourteenth Finance Commission. The commission had noted that since state governments have little to do with the administration and administered rates on small savings instruments, they should not be forced to take financing from the fund. Following this, most states (except Arunachal Pradesh, Delhi, Kerala and Madhya Pradesh) opted out, leaving the Centre more room to use these funds.

“If a pool of resources is available to the central government, then it makes sense to use it rather than going on borrowing more from the markets and crowding out private borrowers.”

Devendra Kumar Pant, chief economist at India Ratings

Pant, however, acknowledged that the borrowings from the NSSF come at a higher cost. At present rates on public provident funds for instance are at 8 percent, marginally higher than the 7.9 percent yield on the 10-year government bond. Since the NSSF also parks its funds in government securities, any direct offtake by the government from that fund reduces the NSSF’s purchases of government bonds in the market. This, in some ways, balances out the positive impact of lower market borrowings.

NSSF: Investment In Public Agencies

Apart from sourcing part of its fiscal deficit financing from the NSSF, the government has also increasingly dipped into this pool to fund public agencies like Food Corporation of India, National Highways Authority of India and Air India.

Data from the receipts budget show that the NSSF’s investments in public agencies went above Rs 1 lakh crore in 2017-18.

The FY18 disbursements included:

• Rs 25,000 crore to FCI.
• Rs 20,000 crore to NHAI.
• Rs 3,000 crore to Air India.
• Rs 58.684 crore to ‘others’.

The budget estimates for FY19 for disbursements from the NSSF to public agencies don’t provide a break-up of the specific agencies to which disbursement is expected. This week, the Times of India reported that Air India availed a Rs 1,000 crore loan from the NSSF.

The Cabinet, in 2017, allowed FCI and other public agencies to borrow from the NSSF. In the case of FCI, “the repayment obligation in respect of NSSF Loans would be treated as the first charge on the food subsidy released to FCI,” said a press release dated 18 January 2017.

The same release added that: “NSSF in the future shall, with the approval of Finance Minister, invest on items the expenditure of which is ultimately borne by Government of India and the repayment of principal and interest thereto would be borne from the Union budget.” These provisions allow the fund to lend to agencies like NHAI and Air India. It is not clear what rates of interest these loans are given at or how these rates are determined.

(Source: Budget documents/receipts budget)

Implications For The Broader Economy

Increased borrowings from the NSSF can help reduce the central government borrowings, but this is balanced out by the increase in state government borrowings. As such, from a borrowings viewpoint the impact is neutral, said Pant.

It also keeps the stated fiscal deficit in check but adds to the overall liabilities of the government, said a senior economist while speaking on condition of anonymity. To the extent that the borrowings by public agencies are guaranteed by the government, it would still need to be disclosed as part of the FRBM requirements. The government’s outstanding guarantees at the end of 2016-17, the latest data available, stood at Rs 3.66 lakh crore, show budget documents. At the start of that financial year, outstanding guarantees stood at Rs 3.44 lakh crore.

Finally, the need to ensure adequate flow of funds into small savings schemes can create an incentive to keep rates high. While rates on small savings rates were supposed to be linked to government securities, the government has not been following this strictly. On 20 September, the government raised the rates on Public Provident Fund and National Savings Certificates by 40 basis points to 8 percent. The higher rates will ensure that inflows into small saving schemes remain strong, said Care Ratings in a note on 1 October.

This story was originally published on BloombergQuint by Ira Dugal. Ira Dugal is Editor - Banking, Finance & Economy at BloombergQuint.