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Small savings collection will fall short of target by Rs22,000 crore

Small savings collection will fall short of target by Rs22,000 crore
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First Published: Fri, Mar 30 2007. 04 48 AM IST
Updated: Fri, Mar 30 2007. 04 48 AM IST
The government will fall short of its targeted collection from small savings receipts by more than Rs22,000 crore this year. It had planned to collect Rs90,000 crore through postal deposits, public provident funds (PPFs), and government-sponsored savings certificates.
The main reason for poor collections would appear to be a growing awareness among small investors of other instruments such as mutual funds where returns could range from 15-25%.
In contrast, the return on small savings is capped at 8.5% for most investors. Its inability to meet the target, however, will not affect the government’s finances in any way. Several states have shown a reluctance to borrow money collected through small savings because they can raise money at lower rates from the market.
A senior finance ministry official who did not wish to be identified said this reluctance had translated into an unwillingness on their part to mobile small savings. Several states have, in the past, encouraged investors to put money in small savings schemes by offering gifts or running lucky draws.
The Union government acts as a trustee for the National Small Savings Fund, or NSSF, into which states deposit the money they raise through small savings; the fund invests the money in plain-vanilla loans or government bonds.
Loans from NSSF come at an interest rate of 9.5%, and various schemes of the fund offer an interest rate of 8.5% to investors (9% for senior citizens). Banks have started offering an interest rate of 9.5-10% on deposits of longer maturity.
“Small savings are just a high-cost liability for both the Centre and states and therefore both are trying to find an honourable exit. The best way to phase it out would be to take away the tax incentives,” said Tapas Sen, fellow, National Institute of Public Finance and Policy.
Against the target of Rs90,000 crore, collections till the end of January were only Rs44,515 crore, according to data from the Controller General of Accounts. And officials at the finance ministry have now set a very modest target of Rs57,500 crore for 2007-08.
Small savings schemes such as PPFs and Kisan Vikas Patras are operated by post offices and a few public sector banks ; they used to offer a high yield and were a preferred investment option. Both benefits, however, have been scaled down progressively. States have also not bothered to mobilize small savings because they collected more revenue on their own—a booming economy resulted in higher tax inflows—and received a higher share of central taxes.
If there is hope for small savings, it is in rising interest rates. States may discover that the five-year moratorium option (they pay only the interest component of the loan for five-years) on 20-year loans from NSSF at 9.5% makes such loans less expensive than 8% 10-year loans
“Even the risk of roll-over is less, making the option attractive for financially weaker states,” said the official at the finance ministry.
Sen did not agree with this: “Since most states are doing reasonably well, market loans still work out to be much cheaper than the interest charged by NSSF plus the handling cost.
“The Centre must put a stop to this practice of forcing NSSF loans down their throats,” he said.
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First Published: Fri, Mar 30 2007. 04 48 AM IST
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