FinMin braces for drop in small savings deposits

Surabhi | | Updated on: Jan 20, 2018

BL31_04_SMALL1 | Photo Credit: NISSAR AHMAD

May rely more on market borrowings to finance the fiscal deficit

In 2016-17, the government expects deposits in small saving schemes such as the Public Provident Fund and the Kisan Vikas Patra to drop due to the reduction in interest rates.

Union Budget 2016-17 has estimated net collections from small savings at ₹22,108 crore, partially lower than the 2015-16 Budget Estimate of ₹22,408 crore. (The Revised Estimate for 2015-16 was almost doubled to ₹53,418 crore.)

In 2014-15, too, the actual collection was far higher than this year’s preliminary estimate, at ₹32,226 crore.

Finance Ministry officials said small savings deposits may be impacted by the lower returns but maintained that they are still in line with the Budget Estimate.

“The impact of the lower returns was built into our calculations. We have kept it at a suppressed level but it is in line with the Budget Estimate for 2015-16,” said a senior government official.

On March 18, the Finance Ministry had announced that interest rates on small savings schemes for the first quarter of 2016-17 would be lowered by 60-130 basis points.

Popular again With attractive and tax-free returns, and the investment limit under Section 80 C of the Income Tax Act enhanced to ₹1,50,000 in Budget 2014-15, these schemes had registered a sharp rise in collections over the last two years.

Typically, deposits in popular small savings schemes such as the Public Provident Fund and the Kisan Vikas Patra are used to finance a small part of the deficit. A decline in collections could force the Centre to rely more on market borrowings to finance its fiscal deficit.

Sources said such a scenario has been factored in during the preparation of the Budget and is partly the reason collections from and securities issued against small savings have been kept marginally lower in 2016-17.

Avoiding market disruptions “At present, we don’t want to disrupt the markets. If required, provisioning will be done in the second half of the fiscal year,” said a second official.

The Centre plans to frontload its borrowings and raise ₹2.48 lakh crore in the first half of the fiscal year, as against its total net borrowing target of ₹4.25 lakh crore for 2016-17. Economists say this could have a limited impact on the Centre’s market borrowing plans. “Small savings pose competition to bank deposit mobilisation. The cut in the interest rates of such schemes would impact collections under small savings to an extent in fiscal year 2017,” said Aditi Nayar, Senior Economist, ICRA.

“The projected net debt receipts from small savings are lower by ₹30,000 crore in the fiscal 2017 Budget Estimate as compared to the fiscal 2016 Revised Estimate, which is equivalent to a relatively contained 6 per cent of the fiscal deficit target for fiscal 2017,” she added.

Published on March 30, 2016
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