Small savings, big burden

The Centre has to bear the maximum burden of borrowing NSSF loans to the tune of Rs 1 lakh crore

Government securities against the collections in the National Small Savings Fund (NSSF) will probably trump the budget estimate of Rs 1 lakh crore this fiscal year on account of an increased public preference for safe and long-term investments.

This has been demonstrated by an almost three-fold jump in the NSSF collections in the first half of FY18 (April-September), at Rs 30,400 crore, from Rs 11,000 crore in the same period of the previous financial year.

This figure does not include contributions to the public provident fund (PPF) through nationalised and other commercial banks. Those have been accounted for by the Controller General of Accounts at Rs 15,000 crore in the first half of FY18, a 25 per cent rise over the same period in FY17.

But this record accretion in the public account is not of any benefit to the government since it borrows from the NSSF at 8.4 per cent, which is much above the market borrowing rate, hovering at around 6.5-7 per cent, making securities drawn against small savings costly.

“Borrowing from the NSSF comes at a heavy cost to the government,” said H K Amarnath of the National Institute of Public Finance and Policy.

To make matters worse for the Centre, states (barring Madhya Pradesh, Arunachal Pradesh, Kerala, and Delhi) do not have to mandatorily borrow from the NSSF as they were required to do before the recommendations of the 14th Finance Commission kicked in.

States had to mandatorily bear the burden of borrowing 80 per cent of the NSSF, and that was later reduced to 50 per cent (with one caveat allowing them to borrow their entire share of 100 per cent as well) after 2011-12, subsequently exempting them from it post 2015-16.

“Small savings are run by the government as a public welfare measure and not for its own benefit,” an official in the finance ministry told Business Standard. Another official said: “The government runs this fund only to facilitate investments of lower- and middle-income classes in secure financial instruments at a cost.”

The NSSF is a centralised fund in the public accounts of India, and distinct from the Consolidated Fund of India, from which budgetary spending is done. It collects public investments in long-term safe instruments such as the post office savings deposits, national saving certificates, public provident fund (PPF), kisan vikas patra, the senior citizen small savings scheme, and the sukanya samriddhi yojana. The NSSF pays higher interest rates to its depositors than prevailing bank fixed deposit rates. 

Before 1999-2000, small savings were part of the Budget, meaning the Consolidated Fund of India, and the amount was used directly to finance the fiscal deficit. After that, the NSSF, a public account, was created.

The first decade of the century witnessed a surge in small savings collections, which led the government to constitute a committee for a review of the NSSF under the chairmanship of the then deputy governor of the Reserve Bank of India, Shyamala Gopinath. The collections dwindled after 2010, only to rise in 2015-16.

While the preference for the PPF shot up but has tapered off in the recent years, post office savings deposits have shown a huge rise after 2015-16, compared to immediate post-financial crisis years. Among the special schemes for weaker sections of society, the investments in the kisan vikas patra and the senior citizens scheme has seen a dramatic doubling in FY18, compared to the sukanya samriddhi scheme for the girl child, which has shown a modest rise.

Securities against small savings — or loans taken against NSSF — hovered around Rs 10-12,000 crore during UPA-II years, when states bore the maximum burden of costly NSSF loans. Come 2017, the Centre has to bear the entire burden of borrowing NSSF loans to the tune of Rs 1 lakh crore, in addition to interest payments which have doubled.

Apart from central and state securities, the Centre also loans NSSF funds to institutions like Food Corporation of India, who received an NSSF loan of Rs 45,000 crore at 8.8 per cent in 2016-17. 

“The importance of small savings instruments in the promotion of financial savings and provision of social security appears to have changed with the structural transformation of the Indian economy,” noted the review committee report on the NSSF (2011). 

The trend of gradually reducing NSSF collections, which saw a blip during the years of the financial crisis and subsequent fiscal stimulus, was reversed by the doubling of collections in 2013-14, and a further doubling in 2015-16, and remains stable at just above Rs 1 lakh crore, with upward propensities in 2017-18. 

West Bengal, Tamil Nadu, Maharashtra, and Uttar Pradesh account for half the net collections in the NSSF in the April-September period 2017-18. Maharashtra led among all states to NSSF contributions in the first decade of the 2000s, after which West Bengal took over.