Money & Banking

Government may not be able to cut small savings scheme interest rate, says SBI report

Our Bureau Mumbai | Updated on February 12, 2020

If the current high rates persist, banks, too, will be unable to cut deposit rates

The increased reliance on small savings to fund a large proportion of the food subsidy bill would make it difficult for the government to cut the small savings interest rate, according to a report by the State Bank of India’s economic research department. The report added that due to this, bank deposit rates may be affected.

What this means is that banks will not be able to cut their deposit rates, as the government is likely to persist with the current high interest rates on small savings schemes.

With regard to the National Small Saving Fund (NSSF), the government has projected a net increase in collection at ₹2.95 lakh crore in FY21 from the revised estimate of ₹2.76 lakh crore in FY20 as per the SBI’s Ecowrap report.

Funding for food subsidy

“Interestingly, when the investment of NSSF funds is looked at, it is observed that a significant amount in FY21 is allocated to the Food Corporation of India (FCI). In FY20, around 76.1 per cent of the additional investment of the fund in public agencies went to the FCI. This has increased to 96.5 per cent in FY21,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.

A gross amount of ₹1.36 lakh crore is budgeted to be invested in the FCI and considering the repayments of ₹68,400 crore, the net amount of investment in the FCI stands at ₹68,200 crore.

“It seems that a large proportion of the food subsidy bill is getting shifted to next year to be funded through the NSSF,” said Ghosh.

The government has reduced the food subsidy bill significantly by ₹75,532 crore in FY20 (revised estimate) when compared to the budgeted estimate. The report assessed that this is assumed to be taken off the Budget and is supposed to be financed from small savings.

In FY20, small savings accounted for 31.3 per cent of the overall fiscal deficit and have been budgeted at 30 per cent for FY21.

“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,” said Ghosh. Gross small saving collections were 25 per cent of incremental bank deposits in FY19.

Published on February 12, 2020

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