What happens when political compulsions come in the way of fiscal prudence? – The Economic Times

Clipped from: https://economictimes.indiatimes.com/news/economy/policy/view-what-happens-when-political-compulsions-come-in-the-way-of-fiscal-prudence/articleshow/81855947.cms

Synopsis–The action to sharply cut interest returns on State-backed small savings schemes (SSS), and a quick correction to reverse it — in what would go down as the fastest rollback of a fairly important government decision. But we can guess.

We know the dictionary definition of oversight: an unintentional failure to notice or do something. What we don’t is what caused the ‘error’ — the action to sharply cut interest returns on State-backed small savings schemes (SSS), and a quick correction to reverse it — in what would go down as the fastest rollback of a fairly important government decision. But we can guess.

Probably, a well-meaning bureaucrat, serving a deficit-conscious government, decided in a righteous urge to reduce the gap in the sovereign’s books. A decision, he believed, was in ‘national interest’ and a mechanical one that is mulled over every quarter, depending on how interest rates moved in the economy. ‘Didn’t we lower it last year?’ the good civil servant may have pondered, before his bosses, caught up in more serious matters, approved. ‘So, what’s the big deal?’ Well, it is, and we are suddenly reminded why.

Most SSS are offered through post offices, close to 90% of which are in rural regions, except Public Provident Fund (PPF) and Senior Citizen Savings Scheme that are operated through branches of scheduled commercial banks. With GoI as intermediary, the schemes serve as risk-free saving avenues and a virtual surrogate of social security in a country that doesn’t have one. A cut in interest on the statutory Employees’ Provident Fund (EPF), though resented, faces lesser resistance as individuals have no direct role in the forced saving mechanism.

SSS is a different story. With banks offering abysmally low returns on deposits, defined-benefit pensions gone, and Dalal Street still an opaque world for many, millions opt for SSS to grow their egg nest and draw down from the corpus to meet expenses. Among this multitude of savers, the largest group belongs to West Bengal, currently the theatre of a fierce political battle. A half-a-point to one-point cut in SSS rates means a 7-16% drop in earnings from such pools — an arithmetic that can sway many fencesitters. For BJP, a correction had to happen before it was too late. Maybe it has learnt from the farm laws.

The events of the past 24 hours showcase the clash between fiscal prudence and political compulsions. The Wednesday evening announcement of a rate-cut follows the finance ministry’s decision to bring transparency in fiscal numbers by ending the arbitrary system of lending from the National Small Savings Fund (NSSF) to Food Corporation of India (FCI) to repay the food ministry for the subsidy — a ploy to show a lower food subsidy and deficit while raising FCI’s debt. For the good bureaucrat, linking SSS interests to market rates was, thus, a natural progression in the reforms path.

Like a corporate treasurer, he may have been driven by other factors. Since GoI is sitting on a large cash balance, the dependence on SSS would be less. It had overborrowed in February and March. Perhaps he thought it made sense to cut SSS rates now as GoI could be forced to raise them in the second half when Shaktikanta Das can no longer talk down bond yields.

A less charitable view is that it’s only a matter of time before SSS rates are lowered — perhaps after the elections, and once the RBI monetary policy committee paves the way with a dovish signal.

Make no mistake. SSS is simply a State-sponsored Ponzi scheme that looks more and more unsustainable as the pool grows. The cost of SSS funds is typically lower than the returns from deploying it. Even without considering the expenses in running post offices, there are very few well-rated debt instruments whose returns cover the interest outgo.

For GoI, SSS is like riding a tiger. It can dismount only after taming the animal. The first steps could be putting in public domain a well-explained formula for calculating SSS rates, so that savers know what to expect, and clearly budgeting for the interest subsidy amount. It has to tread carefully to usher in a more affordable scheme like the definedcontribution pension.

SSS must turn viable over time, with less government intervention in fund use and gradually linking returns to markets. It can help to support government debt on commercial terms (like Japan), as well as work as a buffer when economic turbulence shakes public trust in high-street banks.

For old-timers, Thursday’s rollback was a déjà vu, although in a different way. On April 1, 2000, RBI governor Bimal Jalan had surprised markets by cutting the benchmark bank rate. Jumpy traders, unwilling to believe their luck, held themselves back for seconds, thinking it was a prank by the news agency. For many savers, the early tweets on Thursday seemed like acruel joke till the missing pieces — ‘politics’, ‘Bengal’ and ‘oversight’ — fell in place. It was a moment in realpolitik that played out between sunset and sunrise.

(DISCLAIMER: Views expressed are of the author’s and not of http://www.economictimes.com)

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