On the night of Wednesday, March 31, as the financial year was drawing to an end, the financing ministry released an order to steeply cut administered interest rates on Public Provident Fund (PPF) and little cost savings schemes, with impact from the extremely next day, April 1. For Q1 2021-22, or April-June 2021, it slashed interest on PPF from 7.1% to 6.4%, on the Senior Cost Savings Plan from 7.4% to 6.5%; on National Cost 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 rate of interest under the total 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 big that it takes a while to say it clearly, and would completely use up both lines of a cheque when composed in words. It was rupees one million, 8 hundred and forty-eight thousand, six hundred and fifty-five crore– 1,848,655 crore, or an incredible 9.5% of India’s GDP. It was 98% greater than the real FD for 2019-20, something we had actually never experienced prior to. Had it ended there, we might have been barely able to live with it.But it hasn’t. The spending plan estimate (BE) of the FD for 2021-22 is also enormous at 1,506,812 crore, or 6.8% of GDP. Hence, after falling short by 1,848,655 crore in the fiscal year that has just come to an end, GoI expects to fail yet once again in 2021-22 by another 1,506,812 crore.Such huge numbers need to be put in some viewpoint. 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 3 million mid-range Land Rovers.FD is nothing however the excess of federal government expense over revenues. It needs to be financed by public loaning that, in turn, involves additional dedicated 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 overall expenditure and, more significantly, 43% of its revenue.For 2021-22 (BE), interest payment is expected to increase by 17% to 809,701 crore. That equates to over 1.6 million Land Rovers, 23% of overall expense and 41% of anticipated incomes. Thanks to years of financial deficits and substantial loaning, interest payment is without a doubt the largest item of the main federal government’s expenditure.There are just 2 methods to reduce this expense. One is to gradually obtain less. But that is barely possible with higher FDs. The other is to lower the cost of such borrowings by cutting interest rates wherever possible. That is what triggered the financing ministry mandarins to do what they did on the evening of March 31. Naturally, the decision resulted in a furore– the more so as it happened in the middle of the heat and dust of increasingly combated state elections in Assam, West Bengal, Tamil Nadu, Kerala and Puducherry. P Chidambaram tweeted, ‘I understand that often the federal government acts upon stupid suggestions, but I am impressed how silly this recommendations was. While minimizing the rate of interest on PPF and small cost savings might be technically right, it is absolutely the incorrect time to do so.’Trinamool Congress MP Mahua Moitra wickedly stated, ‘This federal government doesn’t need anyone to embarrass it, it is perfectly capable of doing it itself.’ Her manager, fighting to endure in West Bengal, freaked out in Nandigram. Even Priyanka Gandhi, barely a professional on public financing, took a swipe.I find it hard to think that the civil servants in North Block provided this order without Nirmala Sitharaman remaining in the loop. Things of such value are not done like that. When she rolled back all the small savings rate of interest cuts in less than 24 hours, she tweeted that the order was provided by ‘oversight’ and was, thus, being withdrawn. My bet is that she had actually assented to it, did not realise the awfulness of the timing, and then had the advantage of loyal ‘oversight’-vulnerable bureaucrats taking the hit for her.It was yet another rollback joke. However do not believe that such interest slashing will disappear. It can’t. A grossly puffed up main federal government has to in some way cut expenditure. Reducing rates of interest on public cost savings takes place to be the most administratively hassle-free, for that decision entirely lies within the financing ministry.
Come completion of the very first quarter, when the hurly big of the state elections are done, there could be another effort at minimizing these rates. Perhaps more carefully, and with as much subterfuge as possible.
Because a woefully broke federal government needs to cut expenses. Interest payments are so obvious, aren’t they?(The writer is chairman, Business and Economic Research Group Advisory.)