Small savings: The holy cow few finance minister would want to touch

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You could have run an entire quiz session on small savings and, until a a few years ago, you would have even numerous responses from the audience. It is this level of interest that made successive finance ministers wary of changing any clause in these schemes without any endorsement from the best financial brains in the country. For instance there have been as many as 19 committees in the 26 years since the liberalisation of 1991 that have examined the role of small savings windows run by the Government of India. The first of those was the Rangarajan Committee of 1991, set up as part of the liberalisation menu dished out by the then finance minister Manmohan Singh, in his first Budget. Most of these committees were headed by incumbent or retired deputy governors of RBI. It was politically prudent.  

On Tuesday, when Finance Minister Arun Jaitley announced the merger of these savings into an omnibus Government Savings Promotion Act, he departed from the script. The minister went straight from his Budget announcement to the order without asking for a committee to endorse it. For the middle class today, fed on a diet of mutual funds and insurance, the small savings avenue has clearly fallen off their radar.

But they are still a headache for the banking sector. As a percentage of GDP, small savings are now puny compared with their heydays. In FY 2000, gross small savings collections made up 6.57 per cent of GDP. By FY18 this has dipped to just one per cent. As a percentage of the deposit liabilities of scheduled commercial banks, they still make up 10 per cent, and are a small but a significant constituent of the financial sector

A third of the money comes from the Public Provident Fund (PPF), set up through an act of Parliament in 1968. It positioned small savings for the first time as long-term investment instrument, that too with government guarantee in an economy where the gross saving was just 12.2 per cent of GDP, measured at market prices. There were post office savings schemes of various tenures but none offered a 15-year savings span. For the non-salaried, the name PPF created a feeling of a safety net that was only available to those in government service with their Government Provident Fund. Gross savings jumped to 14.3 per cent the next year and continued to soar thereafter.  

This is the reason why the Oasis Report of 1999, meant to create the framework for a pension revolution in India, compared the proposed pension schemes against PPF to offer guidance for the future. Since then, every finance minister has wanted to trim the basket of benefits that PPF offered, especially its tax-free status but remained wary of public wrath. The years in which finance ministers offered to examine the status, were bruising ones for them. In the first stage, the government managed to hive off the corpus of small savings from its budget. This is what the two R V Gupta committees did. They created the National Small Savings Fund (NSSF), which was detached from the Consolidated Fund of India.

In the subsequent stages, the Y V Reddy Committee, the Rakesh Mohan Committee and the Shyamala Gopinath Committee permitted the government to bring the returns under PPF and other small savings to a narrow cluster around the returns offered by the ten year gilts. It spared the finance minister the brickbats of the annual reset of interest rates on these schemes -- they have mostly been downward from the heady 12 per cent in 1999 to 7.6 per cent at present.

Simultaneously the 12th, 13th and 14th Finance Commissions reorganised the rules for the investment of small savings collections between the Centre and the states. It was necessary, as the states after decades of gorging on the proceeds from the scheme, are now reluctant to eat more. They have cheer money available from the banks and insurance companies.

The split of 1999 was meant to make the schemes self-sustaining. That has not happened. There has been steady accumulation of operational deficits in NSSF accounts, which have crossed Rs 107.67 billion in FY18. This is big and “amounts to financing expenses of a revenue/recurring nature out of capital raised from the retail depositors. So there is a serious sustainability issue with NSSF”  notes  a working paper by S C Pandey written for the 14th Finance Commission. Unfortunately that is an issue which the clubbing of the schemes by the finance minister would not solve.