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Collections under small savings schemes set to touch record high

Collections under small savings schemes set to touch record high
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First Published: Thu, Mar 04 2010. 01 15 AM IST

Updated: Thu, Mar 04 2010. 11 51 AM IST
Kolkata: Collections under the government’s small savings schemes such as post office deposits and instruments such as Public Provident Fund, National Savings Certificate and Kisan Vikas Patra are set to scale a record high in the current fiscal in states such as West Bengal, Maharashtra, Gujarat and Uttar Pradesh, according to finance ministry officials.
In most of these states, where small savings schemes have traditionally been popular, collections till January were far higher than in the full year till March 2009.
In West Bengal, for instance, collections till January at Rs23,238 crore were 21% higher than what people in the state deposited in small savings schemes in the full year till March 2009.
Also See Small Savings, Big Surge (Graphic)
In Maharashtra, the rise was even more striking: Collections till January at Rs19,965 crore were 54% higher than in fiscal 2009.
Economists and finance ministry officials attribute the spurt in small savings deposits to payment of wage arrears to government employees following pay revisions announced in March 2008.
Salaries of state and Central government employees were raised from January 2006. Since then they are being paid arrears in instalments. The Union government paid the second instalment of arrears in August.
“The increase in small savings deposits is largely due to to the Sixth Pay Commission,” said Nasir Sajjad, regional director of small savings in Mumbai.
“People chose to deposit in small savings schemes because on the one hand, they offer assured returns, and on the other, the returns are higher than bank deposits,” he added.
Government employees normally save through safe instruments, according to Mihir Rakshit, former professor of economics at Calcutta University. “For a large section of government employees, the post office is the obvious choice,” he said.
The post office monthly income scheme, which is by far the most popular small savings scheme across India, offers 8% interest a year and a 5% bonus on maturity after six years. A six-year deposit with State Bank of India, the country’s largest bank, would fetch only 7.25% annual interest and no maturity bonus.
In some states, increase in rural income, too, has contributed to the growth in small savings deposits, said Jameel Asghar, regional director of small savings in Kolkata.
“People’s income in rural areas have increased because of various government initiatives such as the Mahatma Gandhi National Rural Employment Guarantee Act, a scheme that guarantees 100 days of work a year to one person in each family,” he says.
In West Bengal, there are over 20 million small savings depositors, and at least 15% of them, or three million people, are from rural areas and economically weaker sections.
The increase in small savings deposits will help states cut borrowing costs in the long run. The Centre gave each state a part of the amount raised through small savings as a 25-year loan carrying 9.5% interest, which is to be reduced to 7.5% from next year under recommendations of the 13th Finance Commission. The Central government gives these funds to states net of new small savings deposits and withdrawals.
States such as West Bengal, Gujarat and Maharashtra have been paying 7.8-8% in the current fiscal to borrow from the market, according to data from the Reserve Bank of India, the country’s banking regulator.
For West Bengal, borrowing cost had shot up to 8.63% in January, according to an official of the finance department of the state government, who spoke on condition of anonymity because he isn’t authorised to speak to the media.
“If more money is available through the small savings route, all states would benefit, more so after the Centre agreed to the demand for reduction in interest rate,” he added.
Graphic by Yogesh Kumar/Mint
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First Published: Thu, Mar 04 2010. 01 15 AM IST