The usual nightmare and hype over India’s Annual Budget for this year is finally over. What should be just a presentation of Statement of Accounts continues to be a mega event of policies and promises (mostly broken).
Anyways, one key is to always see the level of fiscal deficit and the sources of financing the deficit.
- This table shows the fiscal deficit for 2016-17 has beeb revised upwards slightly from Rs 5.34 lakh crore to Rs 5.343 lakh crore. Next year’s fiscal deficit is pegged at 5.46 lakh crore.
- In terms of % of GDP, fiscal deficit was pegged at 3.5% of GDP for 2016-17 and revised figure is also 3.5% of GDP. Nest year is pegged at 3.2% of GDP.
- I don’t know why each budget we raise hype over whether FM will breach fiscal deficit target? We are proved wrong most of the time.
However, what caught my eye was source of financing the deficit . Here, we see the government has lowered its borrowings from market but has increased financing via securities against small savings. These securities are nothing but proceeds of National Small Savings (Kisan Vikas Patra, PPF etc) into special government securities. (Be warned: Messy tables ahead which could confuse one even more).
|Fiscal Deficit (figures in Rs crore)||532791||533904||534274||546532|
|Securities against small savings||52465||22108||90377||100157|
|State Provident Funds||11858||12000||13000||14000|
|Other Receipts (Internal Debts and Public Accounts)||-12202||25677||9948||53513|
|Drawdown of Cash Balance||13170||13195||40227||12844|
I had written a small paper explaining the linkages of fiscal deficit with NSSF securities earlier. Please read the note first before proceeding on the analysis. That time the government raised G-sec borrowing as there was shortage of funds vis NSSF securities.
Based on the note (had to read it again), I tried to figure this year’s data. The data is in table 7A and 7B of the Receipt Budget file.
- On Sources side, There has been a large inflow on account of postal deposits (called savings deposits in the table). It was expected at 2050 Cr but they got Rs 57000 cr.
|A. Opening Balance||991069.5||1015225||1103255|
|1. Savings Deposits||292750||290698.4||420273.1||363219||442809.3||383597.4|
|2. Savings certificates||31902.1||47258.35||23871.8||21889.79||24983.05||22984.28|
|3. Public Prov Fund||76008.74||35535.89||60350.38||31355.94||71343.42||32923.74|
|Total collections (1+2+3)||400660.8||373492.7||504495.3||416464.7||539135.8||439505.4|
|Change (rec – disb)|
|Public Prov Fund||40472.85||28994.44||38419.68|
- On applications side, where we get the securities data we see that the money received from NSSF is going mainly to central securities:
|A. Investments as on 1st April||887353.3||884904.9||994080.5|
|B. Central Govt Securities (1+2)||3267.34||25375.25||5004||95380.57||8504||108661.2|
|1. Special Central Govt Securities||3267.34||9000||5004||35000||8504||40000|
|2. Reinvestment on redemption||16375.25||60380.57||68661.16|
|C. Special State Govt Securities||34402.7||26375.25||39200.99||13000||41041.59||15000|
|D. Investment in FCI Bonds||45000|
|Total Investment in the Year (A+B+C+D)||37670||51751||44205||153381||49546||123661|
|Source of Fiscal Deficit (Disb- Rec)|
As we can see, this is how the centre is getting Rs 90377 cr this year and 100157 cr next year. We saw this data in the first table. In case of confusions do ask as I know it it messy.
Let me also give a brief background to this Centre-State sharing.
Earlier the idea was that States should get maximum share of these securities and their share was to increase to 100%. But in above table we see NSSF not acting as as a source of financing state deficits at all. Infct, States have to give money towards NSSF to honor their redemptions.
However, due to the recommendations of 14th Finance Commission, the States are not interested in this source of fiscal deficit anymore. This BL report explains:
The government’s move to exempt all but four States from mandatory investment norms for the National Small Savings Fund (NSSF) will not only help the Centre lower its dependence on market borrowings, it will also help keep the fiscal deficit in check, while possibly freeing up more funds for investment into public sector units.
The Cabinet announcement on Wednesday followed recommendations by the 14th and 13th Finance Commissions. It will allow States to borrow from the market at more competitive rates.
Economists believe that it will also increase the investible funds of NSSF with the Centre, and these could be used for other purposes.
“This is a major change in NSSF operations. With the availability of excess savings, States can borrow at cheaper rates from the market. Further, since NSSF is part of the Public Account and is off the Budget, it can allow for greater investments through public sector units,” said DK Srivastava, Chief Policy Adviser, EY (India), and a member of the 12th Finance Commission.
As States recede from NSSF, the burden falls on the centre. It is returns from investment in Central Securities which will help give promised returns to NSSF investors and also help run the NSSF.