Govt borrows big from small savings to fund deficit

The Centre has borrowed a historically high Rs 1,25,000 crore from the small savers’ fund to finance its deficit in the current financial year, which is about 67% more than it originally estimated from a scheme which is designed to support households and pensioners.

The aim of small savings schemes is to support the social security of households and pensioners. They also help the government finance part of its expenditure, but increased reliance on such savings to finance deficit may keep the debt under check for a shorter period but ultimately adds to government’s liabilities.

Borrowings from small savings are on increase in the past four to five years. While the Centre says there is nothing wrong in financing deficits from small savings, experts are of the view it raises the cost of funds for the government which ultimately ends up paying higher interest rates.

“It is a double whammy for investments in the economy. The government does not spend enough on investments. At the same time, interest cost keeps rising which obstructs the pick up in private capex too,” said an economist.

Several small savings schemes like senior citizens savings fund, Sukanya Samridhi Yojana and PPF come with a slightly higher interest rate than the average interest on other financial instruments. The Centre borrows from the small savings corpus from the National Small Savings Fund (NSSF) at significantly dearer rates, any time over 8%.

On the other hand, if the Centre borrows from market to service its debt, it comes at a lower cost, but an increased flow of government securities in the market puts an upward pressure on yields. It also prevents the public sector banks from booking profit and paying more dividend to the
government.

On the contrary, when the government switches to small savings for servicing its debt and deficits, it prevents the interest on government bonds from rising, PSU banks book profit, market sentiments improves, but all for a short term.

In 2018-19, the government had budgeted Rs 75,000 crore borrowing from small savings to finance fiscal deficit, but borrowed Rs 1,25,000 crore.