New mechanism sought to disburse small savings

The finance ministry is considering an alternative mechanism for distributing the small savings proceeds with Karnataka and Delhi expressing their inability to use the funds during the current fiscal.

One proposal doing the rounds is to distribute the mop-up from the two states among the other users. The other suggestion of passing on the funds raised from investments in small saving instruments to fund managers for managing them has not found favour with the finance ministry.

The ministry is also against the proposal to reduce the interest rate from the present 9.5 per cent as officials said the repayment was staggered and an additional five-year moratorium was given to states.

Planning Commission officials said the finance ministry is insisting that the corpus of the National Small Savings Fund (NSSF) is so large that states do not need to borrow from the market.

The ministry had written to states trying to impress upon them that they did not need to raise funds as the award of the Twelfth Finance Commission was quite favourable to them.

For the last few months, it has been automatically crediting the amount raised in a state by way of small savings, into the states' corpus, without considering whether the state is willing to borrow that money from the Centre.

However, the interest rates are higher than those available in the market and the states are protesting. The Planning Commission has written to the finance ministry on the issue. The Twelfth Finance Commission had recommended doing away with the system of the 70:30 ratio between loans and grants for extending plan assistance to non-special category states and 10:90 for special category states.

Instead, it had said, the Centre should merely extend plan grants and leave it to the states to decide how much they wished to borrow and from whom. The move was aimed at ensuring greater fiscal discipline in the states and at bringing down the Centre's fiscal deficit.

In April, the Planning Commission had written to the states, saying that for the current fiscal, they will have the option of borrowing from the market. If they were unwilling or unable to do so, they will be provided with Central loans.

The finance ministry, is however, crediting the entire amount collected in a state by way of small savings into the states funds and claiming that no additional funds would be required to be borrowed from the market.

States have been making the case for lowering the rate of interest they have to pay on loans from the small savings corpus, citing the reason that other sources of funds are cheaper.

A number of them, including Karnataka, Delhi and Gujarat have been refusing loans from small savings funds, which include time and recurring deposits in post offices and post office savings accounts, Public Provident Fund, National Savings Certificate (VIII issue) and Kisan Vikas Patras.

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Open to ideas

One proposal doing the rounds is to distribute the mop-up from small savings in Karnataka and Delhi among other states

The other suggestion of passing on the funds raised from investments in small savings to fund managers for managing them has not found favour with the finance ministry

The ministry is also against the proposal to reduce the interest rate from the present 9.5 per cent