Small Savings Exceed Target By Rs 9,640cr

Small savings collections in 1997-98 have exceeded the initially projected level of Rs 14,000 crore by Rs 9,640 crore.

This is largely because of the interest differential on longer maturities between small savings instruments Indira Vikas Patra, Kisan Vikas Patra, Post Office Time Deposits and bank deposits widening to over 3-4 per cent, rendering the latter less attractive for the small saver.

The finance ministry had strived to reduce the interest rates on small savings instruments, but put it off in the face of stiff resistance from state governments. In fact, a committee has been set up by the government to look into the contentious area of disputes like incentives and interest rates between the Centre and states.

 

The finance ministry has also attributed the rise in savings to diversion of a large chunk of the Pay Commissions rewards into small savings schemes to obtain tax shelters.

The ministry has estimated a revenue loss of Rs 2,000 crore on account of diversions like tax deduction at source.

A similar spurt in small savings had occurred in 1994-95 when the government collected Rs 14,000 crore against the target of Rs 6,000 crore an increase of 133 per cent.

On that occasion too the interest differential had widened to 3.43 per cent from 1.87 per cent.

This is because the interest rate correction in that year on say Kisan Vikas Patra was from 14.87 to 13.43 per cent, while for five-year term deposit the correction was relatively steep 13 to 10 per cent.

The spurt has put pressure on the fiscal deficit, as this constitutes borrowings on the account of the Centre even though only 25 per cent of the collections are retained by the Centre and the balance is transferred to the states.

This residual accrual of resources to the Centre alone was responsible for pushing up the fiscal deficit in 1994-95 from 6.2 per cent to 6.7 per cent.

The Centre has also had to absorb the interest cost of these additional savings.

Under the present system of devolution, the Centre transfers the savings at a lower rate of around 12 per cent as compared to what is offered for the small savings schemes implying an interest subsidy.

The states are expected to repay the Centre over a period of 30 years.

The fiscal deficit computed net of savings worked out to 5.8 per cent of gross domestic product(GDP) in 1997-98.

However, taking into account the additional savings growth, the fiscal deficit is 6.1 per cent.

For most of 1997-98, interest rates had witnessed a steep fall of nearly 400 basis points forcing banks to prune deposit rates.

The five-year term deposit rate was dropped from 14-15 per cent in May-June to about 11 per cent.

Your deposit in a bank will double in 7 years, while it will double in five years in a post office term deposit scheme. Going by a back-of-the-book calculation the differential in simple interest rate will work out to nearly five to six per cent, says a senior banker.