Small savings account for fifth of govt borrowing

Centre took ~1,002 bn from here in 2017-18, up from ~904 bn a year before and ~123.6 bn in FY14

There has been a sharp rise in government borrowing from small saving schemes in the last five years, while the contribution of market borrowings was at a 17-year low in 2017-18. According to Reserve Bank of India data, small saving schemes such as post-office deposits, National Savings Certificates and Kisan Vikas Patras accounted for about a fifth (20.9 per cent) of all central government borrowing in 201718, up from 17.2 per cent a year ago and 2.4 per cent in 2013-14. KRISHNA KANT writes

There has been a sharp rise in government borrowing from small saving schemes in the past five years; also, the contribution of market borrowing was a 17year low in 2017-18.

According to data from the Reserve Bank of India (RBI), small savings schemes such as post office deposits, National Savings Certificate (NSC), and Kisan Vikas Patra (KVP) accounted for a little over a fifth (20.9 per cent) of all central government borrowing in FY18, up from 17.2 per cent a year before and 2.4 per cent in FY14. This is the highest contribution from small savings in 19 years ( see chart).

The share from here in total government borrowing has been growing at the expense of the bond market (market borrowing); the latter’s share declined to 72.8 per cent in FY18, from 94.2 per cent in FY14. This, analysts say, has kept a lid on bond yields on the benchmark interest rate in the economy. “By shifting its borrowing to small savings, the government shows lower supply of government securities in the market, preventing yields from rising. This, in turn, improves the market sentiment, as higher yields are bad news for capital markets, including equity,” says Dhananjay Sinha, head of research at Emkay Global Financial Services.

In all, the government borrowed ~1,001.6 billion through small savings in the past financial year, up from ~903.8 billion in FY17 and ~123.6 billion during FY14. In the same period, annual borrowing from the (bond) market declined by 27 per cent, from ~4,756 billion in FY14 to ~3,482 billion. Total government borrowing during the period was down 5.3 per cent, to ~4,782 billion from ~5,050 billion.

The period also saw a jump in government borrowing from the provident fund, from ~97.5 billion in FY14 to ~140 billion in FY18. “Such a shift to non-market instruments suggests the government is actively trying to manage the interest rate in the economy. This weakens the power of the bond market to act as a signalling mechanism or lead indicator for the broader economy,” says an analyst.

The interest rate on small savings schemes such as post office deposits and KVP are fixed by the government every quarter. In contrast, the yields (or interest rate) on government bonds change daily, depending on demand-supply for these in the secondary market. The yield (or interest rate) on the 10-year government bond has declined steadily in the past four years, from a high of 8.8 per cent in FY14 to record low of 6.2 per cent in early 2016. Yields are up by nearly 115 basis points over the past 12 months, in line with a global hardening of rates and a rise in the Centre’s fiscal deficit.

Analysts say the lower bond yields also have indirect benefits for the government.

“Lower yields help public sector banks (PSBs) book profits on their bond portfolio. This allows PSBs to give higher dividends to the government, besides reducing their requirement for fresh equity infusion from the former,” says Sinha. There is an inverse relation between bond prices and bond yields; less of the latter leads to a rally in bond prices. PSBs are largest holders of government bonds, collectively having half of this market.

On the downside, borrowing from small savings and the provident fund is more expensive than market borrowing.