Investment in small savings schemes run by the post office is increasing year after year. In 2013-14, the gross inflow was at 2.08 trillion. they got up 4.88 trillion by 2017-18. In the last financial year 2021-22, these inflows were at a low level 8.78 trillion. Interestingly, among these schemes the strongest inflow was from West Bengal. 1.26 trillion in 2021-22.
Gross inflow to Gross Domestic Product (GDP) in 2013-14 was 1.9%. By 2021-22, this had almost doubled to 3.7%. GDP is a measure of the size of the economy during a particular period.
Why has this happened? Over the years, the interest rates offered on fixed deposits like fixed deposits and recurring deposits have come down. In 2013-14, interest rates on fixed deposits of more than one year varied from 8% to 9.25%. In 2021-22, it had fallen to 5-5.6%. The interest offered on savings account deposits was 4% earlier. Since then it has come down.
In this environment, interest rates on small savings schemes have not fallen at the same pace that is pushing people towards them. This is an unintended consequence of low overall interest rates in the economy. Of course, the tax deductions available on many of these schemes and the fact that they are backed by the government, make them attractive investments in their own way.
Generally, any investment scheme that promises returns of a certain amount, invests its funds elsewhere so that it can generate returns higher than the promised returns. Our small savings plans work differently.
Receipts during a particular year are used to pay redemptions due during that year. Whatever is left goes directly to the budget of the central government and helps in meeting the fiscal deficit. Basically, the government does not finance the fiscal deficit only through the sale of government bonds, it also uses the money coming in small savings schemes.
The money coming now will have to be repaid in the years to come. And this will happen smoothly so long as the money coming into these schemes at any point of time exceeds the redemption payable during that year.
One way to ensure this is to continue to fix the interest rates offered on these schemes at a level higher than that paid on fixed deposits, so that they remain attractive investment propositions.
If the money coming into these schemes in a given year is less than the redemption payable during that year, the government will have to allocate funds from its budget and have its own share. As per the Public Debt Report of March 2022, the total outstanding liabilities of the central government when it comes to small savings schemes are 18.8 trillion, up from 16.3 trillion by December 2021. This will have to be repaid in the coming years by using the fresh inflows in these schemes.
While the outstanding liabilities of small savings schemes are increasing, so is the government borrowing through issuance of bonds. Of course, more borrowing means the government will have to pay more interest to service these bonds. In 2014-15, the total interest paid by the government was 3.27 trillion or 2.6% of GDP. By 2021-22, it had jumped 7.31 trillion or 3.1% of GDP. Earlier, 36.1% of the net tax revenue of the government went towards paying this interest. It has since jumped to 40.1%.
When a larger portion of taxes is used to pay interest on past debt, it leaves less money for other government spending. In this scenario, it is hardly surprising that the government has had to think of new ways of financing its expenditure. One of them is the increase in excise duty on petrol and diesel, leading to an increase in the excise duty earned on petroleum products. 99,068 crore in 2014-15 to 3.63 trillion in 2021-22. Recently, more goods and services were brought under the ambit of the Goods and Services Tax, including pre-packaged, labeled foods such as flour, cheese and yogurt, and upstairs rented hospital rooms. 5,000
To conclude, in response to a question raised in the Lok Sabha, the Ministry of Home Affairs stated that in 2021, 163,370 persons renounced Indian citizenship. In the last three years, the number of citizens who renounced Indian citizenship is 392,643 persons. A question raised in the Lok Sabha asked the Finance Ministry to “share details on the number of Indian high net worth individuals who have left the country and taken citizenship elsewhere since 2019”. To this, the ministry said: “No classification by the expression ‘high net worth’ (HNW) can be made in the absence of its definition in the Income Tax Act, 1961.”
It is true that poor people do not leave the country and take legal citizenship anywhere else. Only the rich do this. This outward movement will have some impact on the personal income tax collection of the country, given that a major part of the tax collected is paid by very few individuals at the top.
Overall, things are not looking good on the fiscal front.
Vivek Kaul is the author of ‘Bad Money’.
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