The tendency of Indian households to persist with an old habit of risk-averse investment choices, and lean towards sovereign fixed-income schemes, doesn’t augur well for the Centre. Latest data on ‘small savings schemes’—the umbrella term for this basket of fixed-income schemes—shows a 2.5 times year-on-year increase in a scheme for senior citizens during the six-month period from April to September 2023. Compelled to offer interest rates that are higher than prevailing market rates on such schemes, the Centre ends up living beyond its means, as is happening in greater measure in recent years.
While there’s no official government release for September figures, official data from April to August bears this out. During this period, fresh collections from savings deposits and certificates shot up 61% on a year-on-year basis. This basket includes small savings schemes like the Senior Citizen Savings Scheme (targeting senior citizens), Sukanya Samriddhi Account (targeting the girl child) and National Savings Certificate. However, fresh collections in another popular scheme, the Public Provident Fund, have declined.
Much as small savings schemes remain popular with Indian households, for the Centre too, collections from such schemes are one option to bridge its fiscal deficit, which was ₹15.8 trillion in 2021-22 and is projected at ₹17.9 trillion in 2023-24. A majority of this fiscal deficit is funded by domestic debt raised by the Centre from various sources. One is the National Small Savings Fund (NSSF), which houses collections from small savings schemes. The share of NSSF in the Centre’s domestic debt has more than doubled between 2017-18 and 2021-22.
Small is big
The NSSF’s share in the Centre’s domestic debt is likely to increase further in 2023-24, given the jump in fresh collections from small savings schemes. Granular collection data on most schemes is not available. This includes the Senior Citizen Savings Scheme, which is currently the big draw. A fixed-income scheme of five years (extendable to eight years), it currently offers 8.2% interest per year, against 7-7.5% currently offered by banks for deposits of a similar tenure. An individual can invest up to ₹30 lakh, while claiming an annual tax deduction of up to ₹1.5 lakh.
Granular data is available for Sukanya Samriddhi Account, which targets the girl child. Besides the annual tax deduction of ₹1.5 lakh, interest from it is also tax-free. In the 17-month period between March 2022 and August 2023, the number of registered subscribers in this scheme has increased by 24% and cumulative investments by 43%.
Above market
Each spike increases the strain on the government to service its obligations towards small savings schemes. That’s because interest rates on small savings schemes, typically, exceed the market rate. Today, a new issue of a five-year government security—bonds issued by the Centre—has an interest rate of about 6.1% per year. By comparison, small savings schemes of a tenure of five years and more offer 7.5-8.2%, plus tax benefits, sweetening the proposition for investors.
Much as the government would like to cut back on raising debt for itself via costlier small savings schemes, and rely wholly on cheaper government securities, it cannot. Political sensitivities emanating from a historical habit of small savings schemes means the government is cautious on fully aligning their returns to prevailing interest rates. Further, their on-tap nature means the government can only stand and take bigger blows when interest spirals, as is the case now.
Widening deficit
When the government is offering 8.2% on a small savings scheme, the simple maths says it needs to earn more than that on the money it raises. It struggles to do that, since it is investing the money it raises principally in debt securities offering market returns. As a result, the NSSF is accumulating losses. Over the 10-year period dating back to 2014-15, the NSSF has reported losses in nine years, with the last four years being fairly severe.
The accumulated deficit in the NSSF is projected to increase from about ₹90,000 crore in 2014-15 to ₹2.5 trillion in 2023-24. The latest surge in collections of small savings schemes will only add to this burden. Over the years, successive governments have tried to walk the tightrope between meeting investor expectations and maintaining fiscal prudence. They have done so gingerly—and with limited success.
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