Inflation control and political pressures on the Reserve Bank of India are making much news, and point to the government’s fairly ad hoc attempts to manage the political fallout of inflationary pressures. Somewhere along the line, one gets a feeling of a casual approach to the management of fiscal and monetary issues that is a little worrying. One example is the management of the National Small Savings Fund (NSSF) collections.
There was an announcement in the Union Budget speech that the Indian Infrastructure Finance Corporation (IIFC) would be allowed to access NSSF as a source for financing infrastructure projects. And now, news reports indicate IIFC’s reluctance to do the same—for two reasons. First, these funds are to be raised at an interest rate of 9.5%—much higher than market—which would make infrastructure lending more expensive, and returns on infrastructure projects relatively lower. It does not seem to make sense for the government to provide rather expensive funds to this corporation and at the same time, encourage the concept of viability gap funding and granting subsidies for such projects.
A second problem is tenure. The NSSF programmes have a maximum tenure of six years, while infrastructure funding requires much longer tenures—in the hydel power sector, tenures of 12 and even 15 years may be necessary. It is clear that the initiative has not been thought through adequately.
The source of the panic on NSSF collections can be seen in Annex-8 of the Receipts Budget that forms part of the Budget documents placed before Parliament. Prior to 1999, all these deposits were accounted for in the Public Account of the Government of India. In 1999, NSSF was established, to which all collections would be credited. The fund is expected to earn enough returns to pay promised rates of interest to the depositors, and take care of its administrative costs. In 2002-03, the Union government directed that 100% of all receipts would be credited to state government special securities, for which the states would have to pay interest at 9.5%. This was fine then, but as interest rates fell in general, the states were reluctant to use these funds, since they could access cheaper funds in the market. The finance ministry was arm-twisting the states to use these funds since 2005. In this skirmish, the funds remained underutilized, and NSSF reported a loss of Rs7,000 crore in 2005-06, and around Rs3,000 crore in 2006-07.
In short, the savings that all of us have made in the post office have shrunk by Rs10,000 crore in the last two years. If the government has to make this up, it would add to the fiscal deficit, but this liability is nowhere reported as a matter of concern.
Therefore, they have thought up this new one—catch hold of IIFC, plunk on it the surplus funds of NSSF that the states no longer want, make it take the funds at 9.5%, so that they can avoid the scam of millions of depositors getting short-changed, and also subsidize infrastructure projects if need be. Convoluted? Believe me, only an Indian finance ministry’s mind can run so many rings.
The sad part is that if they had looked at their own figures a little more carefully, they would have realized that all this is quite unnecessary. As interest rates on bank deposits and fixed deposits have started rising, collections in NSSF are actually getting less. Total deposits grew from Rs1.27 lakh crore in 2004-05 to Rs1.41 lakh crore in 2005-06 and were estimated to go up to Rs1.51 lakh crore in 2006-07. They have not, and the revised estimates for 2006-07 have expectations of only Rs1.23 lakh crore and about the same for the next year. Therefore, savers are moving away to other, better, instruments—rocket science, this, for policymakers! There is little need to fear unmanageable accumulation this year.
Actually, there are two separate problems. If we need fewer flows into NSSF, the interest rates may have to be reset on all the schemes a little lower. This is normally a politically sensitive issue, but this year is a very good year to do so, as higher rates for bank deposits offer attractive alternatives for middle-class savers.
Infrastructure financing is a different type of problem. Long tenure, low- interest instruments are needed, and IIFC or any other institution that is lending for infrastructure needs access to these. The Deepak Parekh committee’s idea of using accumulated foreign exchange is one possibility. Another is to quickly put in place a good corporate bond market, and sort out the internecine squabbles on turf and tenure that have emerged.
A third is some innovative government-backed, long-tenure bond issue by IIFC. Many ways to skin a cat, but I am afraid we don’t like simple solutions.
S. Narayan is a former finance secretary and economic advisor to the Prime Minister of India. We welcome your comments at firstname.lastname@example.org