For Q1 2021-22, or April-June 2021, it slashed interest on PPF from 7.1% to 6.4%, on the Senior Citizen Savings Scheme from 7.4% to 6.5%; on 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%. These were not all. Every administered interest rate under the overall rubric of small savings was cut drastically.
It was an act of fiscal desperation. Here’s why. The revised estimate (RE) of the fiscal deficit (FD) for 2020-21 was a number so large that it takes a while to say it clearly, and would fully take up both lines of a cheque when written in words. It was rupees one million, eight hundred and forty-eight thousand, six hundred and fifty-five crore — ₹1,848,655 crore, or a staggering 9.5% of India’s GDP. It was 98% higher than the actual FD for 2019-20, something we had never witnessed before. Had it ended there, we might have been barely able to live with it.
But it hasn’t. The budget estimate (BE) of the FD for 2021-22 is also massive at ₹1,506,812 crore, or 6.8% of GDP. Thus, after falling short by ₹1,848,655 crore in the financial year that has just come to an end, GoI expects to fall short yet again in 2021-22 by another ₹1,506,812 crore.
Such massive numbers need to be put in some perspective. So, ₹1,506,812 crore is equivalent to well over 500,000 three-bedroom flats priced at an average of ₹3 crore each, or more than three million mid-range Land Rovers.
FD is nothing but the excess of government expenditure over revenues. It has to be financed by public borrowing that, in turn, involves additional committed interest payments. In 2020-21 (RE), GoI’s interest payment on its public debt was ₹692,290 crore — or 1.38 million Land Rovers — which accounted a fifth of its total expenditure and, more importantly, 43% of its revenue.
For 2021-22 (BE), interest payment is expected to rise by 17% to ₹809,701 crore. That translates to over 1.6 million Land Rovers, 23% of total expenditure and 41% of expected revenues. Thanks to years of fiscal deficits and consequential borrowing, interest payment is by far the largest item of the central government’s expenditure.
Hey, Your FD Killed My FD
There are only two ways to reduce this expenditure. One is to progressively borrow less. But that is hardly possible with higher FDs. The other is to reduce the cost of such borrowings by cutting interest rates wherever possible. That is what prompted the finance ministry mandarins to do what they did on the evening of March 31.
Predictably, the decision led to a furore — the more so as it occurred in the middle of the heat and dust of fiercely fought state elections in Assam, West Bengal, Tamil Nadu, Kerala and Puducherry. P Chidambaram tweeted, ‘I know that sometimes the government acts on stupid advice, but I am amazed how stupid this advice was. While reducing the interest rate on PPF and small savings may be technically correct, it is absolutely the wrong time to do so.’
Trinamool Congress MP Mahua Moitra wickedly said, ‘This government doesn’t need anyone to embarrass it, it is perfectly capable of doing it itself.’ Her boss, fighting to survive in West Bengal, went ballistic in Nandigram. Even Priyanka Gandhi, hardly an expert on public finance, took a swipe.
I find it hard to believe that the civil servants in North Block issued this order without Nirmala Sitharaman being in the loop. Things of such importance are not done 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 by ‘oversight’ and was, thus, being withdrawn. My bet is that she had assented to it, did not realise the awfulness of the timing, and then had the benefit of loyal ‘oversight’-prone bureaucrats taking the hit for her.
Guillotine’s 3-Month Reset
It was yet another rollback joke. But don’t believe that such interest slashing will disappear. It can’t. A grossly bloated central government has to somehow cut expenditure. Reducing interest rates on public savings happens to be the most administratively convenient, for that decision entirely lies within the finance ministry.
Come the end of the first quarter, when the hurly burly of the state elections are done, there could be another attempt at reducing these rates. Perhaps more carefully, and with as much subterfuge as possible.
Because a woefully broke government has to cut expenses. Interest payments are so obvious, aren’t they?
(The writer is chairman, Corporate and Economic Research Group Advisory.)