Where your PPF, Sukanya Samridhhi, Post Office money goes

Small savings schemes, which include instruments like public provident fund (PPF) and Sukanya Samridhhi account, are backed by the central government. All deposits received under small savings schemes are credited to the National Small Saving Fund (NSSF). Attractive interest rates and sovereign guarantee make them very popular and the government has been able to raise huge sum through these instruments over the years.

Collections under various small saving schemes, net of withdrawals, during a financial year, form the sources of funds for National Small Savings Fund (NSSF). The net collections are invested in central and state government special securities. Net collections under NSSF are also invested in various public agencies like Food Corporation of India and National Highways Authority of India as well. Interest payment to subscribers of small savings schemes and cost of management constitute the expenditure of the fund and interest on central government securities, state government securities and loan advanced to public agencies forms the income of the fund.

When it comes to NSSF, the government is targeting a net collection of ₹2.95 lakh crore in FY21 from the revised estimate of ₹2.76 lakh crore in FY20

“Interestingly, when the investment of NSSF funds is looked at it is observed that a significant amount in FY21 is allocated to Food Corporation of India. In FY20, around 76.1% of the additional investment of the fund in public agencies went to FCI. This has increased to 96.5% in FY21," SBI economists said in a report.

“Gross amount of ₹1.36 lakh crore is budgeted to be invested in FCI and considering the repayments of ₹68,400 crore, the net amount of investment in FCI stands at ₹68,200 crore. It seems that a large proportion of food subsidy bill is getting shifted to next year to be funded through NSSF," the report added.

The economists say that due to increased dependence on small savings scheme, it would be difficult for the government to cut interest rate on these schemes.

“Going forward, the increased reliance on small savings, in turn, would make it difficult for the government to cut small savings interest rate and thus bank deposit rates might be impacted, the report said.

This was also echoed by Sreejith Balasubramanian, India economist at IDFC AMC.

“NSSF funding of PSEs and central government fiscal deficit (application of funds) has been rising sharply and exceeding its annual core inflows. This suggests lesser incremental space for heavy funding, apart from the issue of rising interest cost and impairment of monetary policy transmission. A major NSSF-rate cut is unlikely although there is some scope now, in the light of the RBI’s recent measure to introduce 1-year and 3-year term repos," he said.