Bitter pills for debt ill

RAISINA HILL

In less than three years, the government has set up two committees to study various aspects of small savings instruments.

The first expert panel was set up in April 2001 under Reserve Bank of India (RBI) Deputy Governor Y V Reddy to review the system of administered interest rates and other related issues pertaining to the transfer of the net proceeds of small savings. Reddy submitted his report in January 2002.

In the Budget for 2002-03, then Finance Minister Yashwant Sinha accepted part of the Reddy panel recommendations, including the benchmarking of small savings interest rates to the average yield on government borrowings in the secondary market, and transferring 100 per cent of the net proceeds to states.

Sinha, however, chose to ignore the panel's recommendations on tax treatment of the small savings instruments. The committee had suggested doing away with the tax incentives on short- and medium-term instruments with a maturity of less than six years.

This year, another expert committee has been set up under the chairmanship of the present RBI Deputy Governor Rakesh Mohan, to suggest means to rationalise the number of small savings schemes. Besides, this panel will also undertake a review of the extent of implementation of the Reddy committee's recommendations.

Issues like transfer of small savings proceeds to states, the interest rates offered on these instruments and their tax treatment, have always been sensitive.

And for good reasons. One, small savings is a source of easy money for states, which the Centre cannot curb. Two, political compulsions have forced the government to consistently offer higher-than-market returns on such instruments and also extend tax rebates.

This year, small savings collections have scaled new heights despite a 100 basis point cut in the last Budget. They have touched Rs 75,000 crore, almost 25 per cent more than the total mop-up of Rs 60,330 crore in 2002-03.

Such an unabated increase in small savings collections has led to a 12- to 13-fold increase in small savings loans to states. What is worrisome is the huge build-up in the Centre's high-cost liabilities.

Though the interest rates on these instruments have been cut from 14 per cent in 1999 to 9 per cent now, it has not been commensurate with the fall in the inflation rate during the years.

The Rakesh Mohan committee has been entrusted the task of rationalising the number of small savings schemes. At present, there are more than half-a-dozen instruments, including National Savings Certificate, Kisan Vikas Patra, Indira Vikas Patra, Post Office Time Deposit and Recurring Deposit Accounts, National Savings Scheme and Post Office Monthly Scheme.

Similar to these are the Government of India Savings Bonds (also know as, RBI Relief Bonds), which exist in two variants, and the yet-to-be notified Dada-Dadi bonds. So, the total number of schemes are close to a dozen.

In its latest meeting in Mumbai last week, the panel said that the interest rates would not be disturbed in the time being. It will be suicidal to do so just ahead of the elections.

While this is understandable, the least the Rakesh Mohan committee can do is spell out the cost of maintaining a plethora of such schemes that benefit particular sections of society.

In simple terms, the government is only extending a subsidy by offering higher rates of returns to a class of investors, purportedly small investors in rural areas that do not have other investment avenues and opportunities.

Besides pruning down the number of schemes, the committee should also address the issue of the huge debt-overhang of states. The debt and guarantees of all states put together have reached unsustainable levels and account for almost 35 per cent of GDP as on March 31, 2003.

While the total outstanding debt of all states stood at Rs 6,71,653 crore in 2002-03, or 29.8 per cent of GDP, the guarantees stood at Rs 1,66,116 crore, or 7.2 per cent of GDP, for the year ended March 2002. To correct the debt overhang, there is an urgent need to cut the Plan borrowings as well as the small savings loans to states.

The government plans to set aside 30 per cent of states' net small savings proceeds a year under the debt swap plan. This does help in limiting the increase in states' debt level, but there is a serious need to review the scheme.

To prudently use small savings, the finance ministry did plan to ask states to earmark another 5 per cent of the annual accretion towards a sinking fund that could function as a lender of the last resort when states default on their guaranteed borrowings. This move can help states to mitigate the suffering if there are defaults.

A more drastic move will be to effect a cut in small savings loans to states either by asking them to apportion higher percentages of such loans for prudent debt management purposes. These will be tough recommendations but the debt ill needs such bitter pills.