Once again the small savings of the people may become a saviour for the Union government to fulfil budgetary shortfall as the economic growth during FY19 will likely weaken to 6.9 per cent in Q3 from the 7.1 per cent in the Q3, said India Ratings and Research in a recent report.
“The Union government may borrow more than the 21 per cent budgeted for FY20 to cover its fiscal deficit requirements from the national small savings fund (NSSF) and state provident funds (SPF),” said India Ratings and Research.
The move will ease pressure on the benchmark 10-year-G-sec yield and keep the cost of government borrowings through extra budgetary resources (EBR) via public sector undertakings (PSUs) low, said the report.
NSSF was established for pooling the money from different small saving schemes. The exclusion of States and Union Territories except Arunachal Pradesh, Kerala, Delhi (UT) and Madhya Pradesh from National Small Savings from April 2016 has created more room for borrowings by the centre and PSUs. However, it is to be noted that the cost of borrowings from NSSF is higher than that for market borrowings.
The government in past few years has increased its reliance on the borrowings from the NSSF. Although the target of 21 per cent for FY20 is marginally down from 22.4 per cent in FY19, it is significantly higher than 3 per cent in FY15.
“It would be foolishness on the part of government if it will go to the market for borrowing when there is money idle in the NSSF account for which the government is already paying interest,” Devendra Pant, Chief Economist, India Ratings and Research, told Financial Express Online.
Even though the cost of borrowing from NSSF is high, its impact on the fiscal deficit in the medium to long run is uncertain, Devendra Pant said. The government can create a higher return which will absorb the interest cost, if the borrowings are done for capital expenditure, he added.
On the other hand, EBRs are the financial liabilities raised by PSUs for which repayments are made using the central government budget. Keeping such liabilities outside the government accounts understates the fiscal deficit/GDP and debt/GDP ratio, noted the report. If EBR of PSUs are included, the gross borrowings of union government in FY20 will increase to Rs 16.8 trillion from the Rs 15.3 trillion in FY19, said India Ratings in the report.