Small savings fund swells as returns on bank FDs fall

The national small savings fund (NSSF), the aggregate of small savings investments in the country, has surged to its highest level since the turn of the century, as savers are now pouring money into government schemes because of the large interest rate differential between these schemes and bank fixed deposits.

The huge surge in these funds could lead to lower market borrowing by the government next fiscal. Already, in the current fiscal year ending March 2017, the government has cut its borrowing by Rs. 18,000 crore partly due to the surge in these deposits, economists said.

So far, in the current fiscal until November, a net amount of Rs. 1.01 lakh crore has been deposited in funds like the Public Provident Fund ( PPF), Kisan Vikas Patra (KVP) and National Savings Certificate (NSC). This fund is customarily used to finance government deficit. This amount is almost double the Rs. 50,890 crore which poured into this fund last fiscal year ended March 2016 and the highest since the fiscal ended March 2001.

The main reason for the surge in deposits is the huge gap between these savings and bank deposit rates. For example, State Bank of India ( SBI) used to offer five to 10-year fixed deposits at 8.5% in 2014, compared to the 8.7% offered by PPF, which marked a gap of 20 basis points.

Since then, SBI's deposit rate for five to ten-year deposits has dropped to 6.5% as interest rates have fallen and banking liquidity improved. However, PPF rate has dropped only from 8.7% then to 8% now widening the gap between SBI deposit rate and PPF rate to 150 basis points. One basis point is 0.01 percentage point.

Economists say the government will benefit from this surge in deposits. “Next fiscal, the government will benefit from the voluntary income disclosure scheme and dividend income from RBI post-demonetisation. We have also taken into account higher small savings.

However, the government will need to spend to fund public capital expenditure to support growth which will increase market borrowings,“ said Indranil Sen Gupta, chief India economist at Bank of America-Merrill Lynch.

Sen Gupta expects net government borrowing next fiscal to be at Rs. 5 lakh crore higher than the Rs. 4.40 lakh crore net borrowing in the current fiscal year. He expects the government's fiscal deficit target to remain at 3.5% the same as the current fiscal.