View: The Central government may not be able to bite the small saving interest bullet for long


On the night of Wednesday, March 31, as the monetary yr was drawing to an finish, the finance ministry issued an order to steeply lower administered interest charges on Public Provident Fund (PPF) and small financial savings schemes, with impact from the very subsequent day, April 1.

For Q1 2021-22, or April-June 2021, it slashed interest on PPF from 7.1% to 6.4%, on the Senior Citizen Savings Scheme from 7.4% to 6.5%; on National Savings Certificate from 6.8% to 5.9%; on the Sukanya Samriddhi Account from 7.6% to 6.9%; and the Kisan Vikas Patra from 6.9% to 6.2%. These have been not all. Every administered interest fee beneath the general rubric of small financial savings was lower drastically.

It was an act of fiscal desperation. Here’s why. The revised estimate (RE) of the fiscal deficit (FD) for 2020-21 was a quantity so giant that it takes some time to say it clearly, and would absolutely take up each strains of a cheque when written in phrases. It was rupees a million, eight hundred and forty-eight thousand, 600 and fifty-five crore — ₹1,848,655 crore, or a staggering 9.5% of India’s GDP. It was 98% larger than the precise FD for 2019-20, one thing we had by no means witnessed earlier than. Had it ended there, we’d have been barely able to stay with it.

But it hasn’t. The funds estimate (BE) of the FD for 2021-22 can also be large at ₹1,506,812 crore, or 6.8% of GDP. Thus, after falling brief by ₹1,848,655 crore in the monetary yr that has simply come to an finish, GoI expects to fall brief but once more in 2021-22 by one other ₹1,506,812 crore.

Such large numbers want to be put in some perspective. So, ₹1,506,812 crore is equal to nicely over 500,000 three-bedroom flats priced at a mean of ₹3 crore every, or greater than three million mid-range Land Rovers.

FD is nothing however the extra of government expenditure over revenues. It has to be financed by public borrowing that, in flip, includes further dedicated interest funds. In 2020-21 (RE), GoI’s interest cost on its public debt was ₹692,290 crore — or 1.38 million Land Rovers — which accounted a fifth of its whole expenditure and, extra importantly, 43% of its income.

For 2021-22 (BE), interest cost is predicted to rise by 17% to ₹809,701 crore. That interprets to over 1.6 million Land Rovers, 23% of whole expenditure and 41% of anticipated revenues. Thanks to years of fiscal deficits and consequential borrowing, interest cost is by far the largest merchandise of the central government’s expenditure.

Hey, Your FD Killed My FD

There are solely two methods to scale back this expenditure. One is to progressively borrow much less. But that’s hardly attainable with larger FDs. The different is to scale back the price of such borrowings by chopping interest charges wherever attainable. That is what prompted the finance ministry mandarins to do what they did on the night of March 31.

Predictably, the resolution led to a furore — the extra in order it occurred in the center of the warmth and dirt of fiercely fought state elections in Assam, West Bengal, Tamil Nadu, Kerala and Puducherry. P Chidambaram tweeted, ‘I know that sometimes the government acts on stupid advice, but I am amazed how stupid this advice was. While reducing the interest rate on PPF and small savings may be technically correct, it is absolutely the wrong time to do so.’

Trinamool Congress MP Mahua Moitra wickedly mentioned, ‘This government doesn’t want anybody to embarrass it, it’s completely able to doing it itself.’ Her boss, preventing to survive in West Bengal, went ballistic in Nandigram. Even Priyanka Gandhi, hardly an professional on public finance, took a swipe.

I discover it exhausting to consider that the civil servants in North Block issued this order with out Nirmala Sitharaman being in the loop. Things of such significance are not finished like that. When she rolled again all the small financial savings interest fee cuts in lower than 24 hours, she tweeted that the order was issued by ‘oversight’ and was, thus, being withdrawn. My guess is that she had assented to it, did not realise the awfulness of the timing, after which had the good thing about loyal ‘oversight’-prone bureaucrats taking the hit for her.

Guillotine’s 3-Month Reset

It was one more rollback joke. But don’t consider that such interest slashing will disappear. It can’t. A grossly bloated central government has to by some means lower expenditure. Reducing interest charges on public financial savings occurs to be the most administratively handy, for that call solely lies inside the finance ministry.

Come the finish of the first quarter, when the hurly burly of the state elections are finished, there may be one other try at decreasing these charges. Perhaps extra fastidiously, and with as a lot subterfuge as attainable.

Because a woefully broke government has to lower bills. Interest funds are so apparent, aren’t they?

(The author is chairman, Corporate and Economic Research Group Advisory.)




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