View: Central government may not be able to bite the small bullet of savings interest for a long time

On the evening of Wednesday, March 31, as the financial year drew to a close, the Ministry of Finance issued an order aimed at sharply reducing the interest rates administered on the Public Provident Fund (PPF) and the small plans of savings, with effect from the next day. , First of April.

For the first quarter 2021-22, or April-June 2021, it reduced the interest on the PPF from 7.1% to 6.4%, on the savings plan for seniors from 7.4% to 6, 5%; on the national savings certificate from 6.8% to 5.9%; on the Sukanya Samriddhi account from 7.6% to 6.9%; and the Kisan Vikas Patra from 6.9% to 6.2%. They are not all. Every interest rate administered under the overall rubric of small savings has been drastically reduced.

It was an act of fiscal desperation. Here’s why. The revised estimate (RE) of the budget deficit (FD) for 2020-2021 was such a large number that it takes a while to say it clearly, and would fully take both lines of a check when written with words. It was one million eight hundred and forty-eight thousand six hundred and fifty-five rupees – ₹ 1,848,655 crore, or 9.5% of India’s GDP. It was 98% higher than the actual FD for 2019-2020, which we had never seen before. If it had ended there, we might have barely been able to live with it.

But this is not the case. The FD’s budget estimate (BE) for 2021-2022 is also massive at ₹ 1,506,812 crore, or 6.8% of GDP. So after running out of ₹ 1,848,655 crore in the just ended fiscal year, the GoI expects to be below ₹ 1,506,812 crore again in 2021-2022.

These massive numbers need to be put into some perspective. So ₹ 1,506,812 crore equates to well over 500,000 three-bedroom apartments averaging ₹ 3 crore each, or over three million mid-range Land Rovers.

FD is nothing more than the excess of public expenditure over revenue. It is to be financed by government borrowing which, in turn, involves additional interest payments incurred. In 2020-2021 (RE), the GoI’s interest payment on its government debt was ₹ 692,290 crore – or Land Rover’s 1.38 million – which was a fifth of its total spending and, more importantly, 43% of its income.

For 2021-2022 (BE), the interest payment is expected to increase by 17% to ₹ 809,701 crore. This translates to over 1.6 million Land Rovers, 23% of total spend and 41% of expected revenue. Thanks to years of budget deficits and consecutive borrowing, interest payments are by far the most important item of central government expenditure.

Hey, your FD killed my FD

There are only two ways to reduce this expense. The first is to gradually borrow less. But this is hardly possible with higher FDs. The other is to reduce the cost of these loans by lowering interest rates where possible. This is what prompted the mandarins of the Ministry of Finance to do what they did on the evening of March 31.

As might be expected, the decision led to an uproar – especially since it occurred amid the heat and dust of bitterly contested state elections in Assam, the West Bengal, Tamil Nadu, Kerala and Pondicherry. P Chidambaram tweeted: ‘I know sometimes the government acts on stupid advice, but I’m amazed at how stupid that advice was. While reducing the interest rate on PPFs and small economies can be technically correct, now is absolutely not a good time to do so.

Trinamool Congressman Mahua Moitra said viciously: “This government does not need anyone to embarrass it, it is perfectly capable of doing it itself.” His boss, struggling to survive in West Bengal, went ballistic in Nandigram. Even Priyanka Gandhi, barely an expert in public finances, took a hit.

I find it hard to believe that the North Block officials issued this order without Nirmala Sitharaman being in the loop. Things of such importance do not happen like that. When she rolled back all the small savings interest rate cuts in less than 24 hours, she tweeted that the order was issued out of “forgetfulness” and was therefore withdrawn. I bet she had consented, hadn’t realized the horrible timing, and then had the benefit of loyal “watch” prone bureaucrats taking the blow for her.

Guillotine 3 month reset

It was yet another throwback joke. But do not think that such a reduction in interest will go away. It can’t. A grossly inflated central government must somehow cut spending. Reducing interest rates on public savings is proving to be the most administratively practical solution, as this decision rests entirely with the Ministry of Finance.

Coming to the end of the first quarter, when the state election whirlwind is over, there could be another attempt to cut those rates. Perhaps more carefully and with as much subterfuge as possible.

Because an unhappy government must cut spending. Interest payments are so obvious, aren’t they?

(The editor is chair of the Business and Economics Research Group Advisory Board.)