How NSSF could morph from a rainy-day fund into a huge burden for the govt

Illustration: Binay Sinha
Small savings instruments such as post office deposits and public provident fund, the preferred fixed-income avenues for the middle class and low-income households, have now blown up to start becoming a burden on the government’s coffers. 

The Central government’s interest payments towards the National Small Savings Fund will rise 12-fold in six years-- from a paltry Rs 4,900 crore in FY16 to close to the budgeted Rs 60,000 crore in FY22. Though enhanced borrowing will entail higher interest payments anyway, replacing market borrowing by NSSF loans is likely to demand Rs 7,500 crore more, a Business Standard calculation shows. 

But the Centre is being prompted to dip into the NSSF to finance its deficit due to the rapid bulging of the Fund itself, courtesy a steady inflow of savers’ money into it. Hardy a surprise, as a five-year deposit offers a saver an interest of 6.8 per cent in the post office, compared to 5.3 per cent offered at the State Bank of India.

But when the Fund needs to offer much higher than the market rate to the saver, wouldn't this logically result in the Fund lending at a higher rate to whoever borrows from it? How else would it serve the saver's needs? That is what is precisely happening. 

The NSSF is lending to the government at 7.4 per cent this year, according to a source familiar with the working of the Fund. This is at least 1.5 percentage points higher than the rate at which the government borrows from the market, which was 5.82 per cent in the first half of FY21. The government can borrow a 10-year loan at six per cent today, still substantially lower than what it needs to pay the NSSF.

Growing expanse of the NSSF 

Small savings would directly be taken up in the Consolidated Fund of India, on to the Budget books, till 1999. Since the 2000s, central government has been borrowing from NSSF, but now in its avatar as a public account, where the government’s role is that of a trustee.

But the trusteeship has gone so far this year, that the Union government will borrow Rs 4.8 trillion ($66 billion) from the National Small Savings Fund, a massive 26 per cent of the total deficit financing needs, or the fiscal deficit, of Rs 18.5 trillion ($254 billion). Four years ago, when the fiscal deficit was Rs 5.9 trillion, the dip into the NSSF was shallow at Rs 67,000 crore (11 per cent). 

To begin with, the government keeps rates on small savings higher than the market rates to cater to that very section of the society which does not have access to market savings instruments, but want to keep money aside for higher education of children, investments on the farm, or post-working age spending.  

“The government looks at small savings as its duty towards the public, and thus, offers a higher rate than the market,” said the source. This makes the NSSF loans costly. 

Rising interest burden
Due to this, the rate at which the NSSF lends to the government has been substantially higher than the market rate. But this year, its impact would be more pronounced, due to the size of the chunk that is being borrowed from the Fund. 

At its current size, the interest rate difference may result in extra interest outgo to the tune of Rs 7,500 crore this year. Such a higher interest impact would persist till the repayment of the NSSF loans, which is unlikely to happen. Rather, the opposite would happen. 

The Union Budget expects another Rs 3.9 trillion to be borrowed from the NSSF in FY22, further increasing the burden on the exchequer. 

Since 2014-15, when the mandatory requirement for states to borrow from the NSSF was lifted, their interest payment towards the fund has been declining. That of the Centre, however, has grown 12-fold since FY16. Even in the most recent two years, it is expected to almost triple.

Looking at the macroeconomic parameters, this change is now showing up in the debt profile of the Union government. Outstanding NSSF loans occupied about 6 per cent in the total public debt stock of the Union some years ago, which went close to 10 per cent in recent years. 

In FY21 and FY22, NSSF debt stock will cross 10-11 per cent of the total public debt stock with a reasonable certainty. 

In any case, higher the nominal growth in the economy in coming years, smaller would be the burden of servicing this costly debt. 

But it leaves two big questions on the table, one which will be important in the short and the medium term, and the other, in the medium and longer term. 

In the short to medium term, will the government align interest rates close to term deposits? A recent move by the Reserve Bank of India might give a hint. 

In its recent policy meeting, the RBI said that it will open up a direct in-house channel for retail investors to put money into government securities. As of now, individuals can invest into G-Secs, but indirectly. The new move will enable accessing the G-Sec market through something like a demat account. 

Though experts are inclined towards thinking that this may turn out to be a damp squib, they do think that the policy is intended to bring public savings directly to the government, rather than through the costly route of small savings. 

To this account, officials have previously told Business Standard about the possibility that the rich and the well-off, too, are investing into the NSSF, possibly opening up the fund—and its premiums—to those for whom the perks are not intended in the first place. 

This brings us to the second question: If the NSSF keeps bulging like this, where would the government park these funds?

Unless the RBI gambit succeeds, more money would keep accruing under small savings, and costly loans would take up a higher share in the central government’s debt stock. 

This could bring the NSSF in a situation similar to the original behemoth of public savings, the Employees Provident Fund Organisation (EPFO). The EPFO is paying subscribers an interest at the rate of 8.5 per cent this year. It invests subscribers’ money in the debt market, mostly with central and state government securities, bonds of state-owned companies, which are now offering a much lower rate than the rate at which it needs to pay the subscribers. 

Citizens have been raising their voice on social media websites, complaining about the delay in the payment of interest for the year 2019-20, by the EPFO. 

The Comptroller and Auditor General of India has observed a few inconsistencies in the handling of the NSSF account by the Centre. 

“The NSSF carried an accumulated deficit of Rs 1.13 trillion as on 31 March 2019, which constitutes Government liability,” the financial audit of Union government finances for the year 2018-19, published in September 2020, noted. 

Whether it is the rationalisation of interest rates, or bringing institutional changes in the Fund, the central government is likely to find itself in a position where it needs to act.

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