Annexure 11

Two measures are used to assess the inter-state dispersion of net proceeds going towards various States. First, the share of top four States to aggregate net collection of all states has been worked out. Accordingly, it is evident that the share has come down from 55.1 per cent in 1991-92 to 45.4 per cent in 1994-95 showing an improvement in the distribution. However, it deteriorated since 1995-96 to reach 56.1 per cent in 1997-98 before showing a marginal improvement during 1999-2000 and 2000-2001. Secondly, the dispersion as measured by coefficient of variation also exhibited a similar trend in that it improved from 121.2 in 1991-92 to 108.7 in 1994-95 and deteriorated thereafter to reach 125.6 in 1999-2000. However, the aggregate mobilisation does not appear to be affecting the inter-state dispersion, which tend to grow during the early as well as late nineties, although trend in net mobilisation was low in the initial years but high in the late nineties.

It is interesting to note that mobilisation at the aggregate as well as at State levels was not responsive to the revision of administered interest rates in the manner it is normally expected. It so happened that mobilisation declined in spite of the revision in interest rate upwards and improved even if the rates are adjusted downwards. In pursuing the analysis, the period since 1991-92 may be divided into four sub-periods, 1991-92 to 1992-93, 1993-94 to 1994-95, 1995-96 to 1996-97 and 1997-98 to 2000-2001 based on the prevailing interest rate in the financial market in India to which administered rates on small savings are aligned partially. For example, the market condition for the first and third sub-periods was tight, although small saving rates are raised in the first sub-period but was not revised at all during 1995-96 to 1996-97. During second and fourth sub-periods, the market condition was comfortable and administered interest rates were adjusted downward in line with the same, albeit with a lag.

Period-wise growth rate of aggregate net proceeds from small savings reveals that it goes up handsomely when market condition is comfortable but declines or exhibited a lower growth as and when the market is tight. The trend persists irrespective of the fact that administered rates on small savings also adjusted in line with market situation. Accordingly, even if administered rates on small savings are hiked, net proceeds from small saving declined or registered moderate growth rate during 1991-92 to 1992-93. On the other hand, net proceeds grew handsomely during 1993-94 to 1994-95, notwithstanding a cut in the administered rates. Almost similar trend is repeated for the period 1995-96 to 1996-97 and 1997-98 to 2000-2001, when net proceeds declined in the first period although no revision of interest rates had been carried out during this phase. Alternatively, collection went up in the second phase, notwithstanding a cut in rates on small saving schemes across the board. This possibly reveals that the proceeds from small savings are not much sensitive to an adjustment in nominal interest rates.

In order to ascertain the underlying reason behind the growth of small saving collection, earlier studies had identified the income of the households as a major determinant of the same¹ . The Committee has also examined the issue and observed that personal disposable income is an important determinant of small saving receipts at the macro level apart from the interest rate differential between small saving schemes and the comparable financial instruments.

At present, a number of schemes are in operation with varying features according to the needs of the small investors. For each scheme, statutory rules are framed indicating details such as the rate of interest, maturity period, tax benefit etc. from time to time. Table 7 gives broad details of the rate of interest on these schemes as and when it was revised since 1970-71.

Barring post office saving deposit rate, all other rates moved upward during the early 1990s. Since 1993, these rates were generally steady up to the late 1990. Since 1998, all these rates have been reduced in phases. However, the market dynamics of changes in interest rates are rarely reflected in the small saving rates as these rates are administered. Therefore, small saving rates remained generally inflexible.

Interest rates on small saving schemes, in general, had been kept typically above the commercial bank deposit rates of similar maturity. As these schemes were essentially targeted to mobilize rural income, it was not thought of to be disadvantageous to commercial banks. But of late, these have posed direct competition to bank deposits, owing to proliferation of banking network during the post-nationalization period. The administered rates on small saving schemes tended to be more rigid than the rates on bank deposits, especially after the deregulation of the later in the nineties. However, some rationalisation of interest rates on small savings since 1999-2000 has led to a converging trend between these two.

Various tax benefits are available on small saving schemes as pointed out in Table 1. Mainly, three types of benefits are accruable to these schemes from the various provisions of Income Tax Act, which could enhance the effective cost of issue under small saving schemes to the Central Government. These are tax rebate of 20 per cent governed by Section 88, tax deduction covered by Section 80L and tax exemptions allowed under Sections 10(11) and 10(15) of the Income Tax Act, 1961. The scope of Section 88 has been expanded continuously and therefore tax rebate has gone up from Rs. 10,000 in 1991-92 to Rs. 12,000 in 1993-94 to Rs. 14,000 in 1997-98 and further to Rs. 16,000 in 2001-02. The amount of deduction due to interest income permitted under Section 80L stands at Rs. 12,000. Other benefits include capital gains tax and wealth tax in case of certain small savings.

Foregone income tax revenue is the other constituent of cost, which is calculated here by deducting 20 per cent of gross mobilisation during the year for the schemes eligible for tax deduction under Section 88 of Income Tax Act, e.g., NSS 1992, NSS (VIII Issue) and PPF. Moreover, another 20 per cent of interest income are added to cost for schemes that enjoy tax free interest income under Section 10 or 80L of Income Tax Act. The 20 per cent tax rate on interest income are considered based on the assumption that all investors uniformly fall in this income tax bracket and they actually reap the tax benefit on interest income. Toward this end, the details of cost for the financial year 1999-2000 are tabulated (Table 10).

Total cost as well as its componentwise break-up as percentage to gross mobilisation of the same year as well as the outstanding balance at the beginning of the year is giving some idea behind the overall cost of instruments vis-à-vis the size of corpus. Consequent upon this exercise, the total costs during 1999-2000 as per cent to gross mobilization of the same year and outstanding balance of the previous year turn out to be 46.81 per cent and 16.51 per cent, respectively. Interest payments account for nearly 74 per cent of the total cost, cost of foregone tax revenue consist of nearly 20 per cent, while rest 6 per cent being the operational cost of the schemes. Apart from these costs, the State Governments also incur expenditure on the establishment of Directorates of small savings, on publicity and on incentives to subscribers and agents.

The small savings emerged as a significant part of States finance over the years in view of the fact that bulk of proceeds mobilized under the schemes are actually transferred to the States. The share had been increasing over the years due to the statutory arrangement of transferring resources from Centre to States over the last two decades. Nearly 66 per cent of net collection in a States was passed on as long-term loans to the States until 1985-86. The share has gone up to 75 per cent in 1987-88 and further to 80 per cent in 2000-2001.

Under the previous institutional set up of resource sharing, the Centre used to pass on a share of net small savings collection to the States in the form of non-Plan loans until 1998-99. The loans were repayable in 25 years with an initial 5-year moratorium on repayment of principal and carried interest rates as specified by the Government of India from time to time. As, the average duration of the small saving schemes is 6 years, by the time State Governments start repaying the principal, the Central Government had nearly repaid the liability. The repayment of the principal by States with a lag matches only a part of the revenue expenditure of the Central Government. Moreover, the revenue receipts on account of interest payment on loans to States did not fully meet the expenditure of interest payment to subscribers mainly because the amount on which the interest was payable to subscribers was more than the amount of loan to the States. The net interest cost on these schemes is also reflected on the Government of India account further widening its revenue deficit. Combination of these loans provided to States by the Central Government as well as interest outflows to investors therefore, formed a part of Center’s gross fiscal deficit.

In view of the maturity mismatch of the loans and their effect on revenue expenditure, Central Government charge some spread on lending rate advanced toward the State over the interest rate paid to investors under small saving schemes. Charging of this spread should be seen in conjunction with the cost incurred by the Central Government in managing the funds, credit risk arising out of the insolvency of State Governments and problem of funds management due to maturity mismatch of inflows and outflows. Last but not the least is the implicit Central Government guarantee associated with small saving schemes that gives added convenience to States for raising funds from the small investors.

The rate of interest on erstwhile loans to State Governments and special securities issued after the creation of NSSF in April 1999 varied from 13.0 to 15.0 per cent against the share of small saving collections. Charging of this interest should be viewed against the weighted average small saving mobilisation rate ranging from 8.7 to 11.4 per cent and weighted average interest rate on market borrowing of States from 11.6 to 14.0 per cent in recent years. Therefore, the implicit spread between the rate charged by Central Government to States on their loans/investment and average cost of funds under small saving is varying from 2.5 to 3.8 per cent for different years. Further, the yield spread from the special securities issued by State Government from their weighted average market borrowing rate is positive until 1999-2000 and varying between 0.5 to 2.1 per cent from 1991-92 to 1999-2000 before it turn out to be lower by 60 basis point in March 2001 (Table 11).

It is evident from the table that the change in interest rates on various small saving schemes is not always accompanied by an equivalent adjustment in the rates of interest chargeable by Central Government to the States. Notably, the spread turns out as wide as 2.3 - 3.8 per cent during 2000-2001 in view of sharp fall in administered rates on small saving as opposed to one per cent in interest rate cut in special securities of State Government. Notably, yield on special securities was reduced only by two percentage point since 1995-96, when market condition improved considerably and average interest rate on State Government market borrowings come down from 14.0 per cent in 1995-96 to 11.6 per cent in 2000-2001. This shows that benefit of a favourable market condition and the cut in nominal rate on small savings is not being fully passed on to the State.

Prior to April 1999, all capital receipt and payments under the various small saving schemes were accounted for in the Public Account of India. On the other hand, revenue receipts and payments were charged to the Consolidated Fund of India. Both interest payments by the State/UT Governments, the disbursements of loans by Central Government as well as the loan repayments by States and Union Territories were entered in the Consolidated Fund of India.

With effect from the fiscal year 1999-2000, a salient change in the extant system was brought about in the accounting of small savings by creating a National Small

Savings Fund (NSSF) in the Public Account of the Central Government. Under the changed accounting system, all small savings collections are credited to this Fund. All withdrawals of small savings by the depositors are made out of the accumulation of the Fund and balance in the Fund is invested in the Central and State Government securities as per the norms decided by the Central Government from time to time. The debt servicing of these government securities would be an income of the Fund, while the expenditure of the Fund would comprise the interest cost and cost of management of small savings. The amount released to States is treated as investment in special securities to be redeemed from the sixth year over a period of 20 years. Since April 1999, the Centre’s share in the net collections is also treated as investment of NSSF in special GoI securities on the same terms and conditions as of the State Government securities.

With the change in accounting practice, the amount outstanding as at end-March 1999 against the head "small savings, deposits and PPF", was converted into Central Government securities and is treated part of "internal debt" of the Central Government since the fiscal year 1999-2000. The total outstanding liabilities under NSSF (including that of the States), however, continue to form part of the Center’s liabilities. The outstanding balances of Rs.1,76,220.92 crore standing at the credit of the account holders and holders of certificates under various small saving schemes as on 31.3.1999 are also treated as an investment of NSSF in the special GOI securities. These special securities are redeemable on call and bear interest rate of 11.5 per cent per annum. Subsequently, Rs. 8978.88 crore and Rs. 6944.21 crore were invested in 13.50% Special Securities of GOI against share of net small saving collections from 1.4.99 during 1999-2000 and 12.50% Special Securities of GOI against share of net small saving collections from 1.4.99 during 2000-2001 (Upto 31.1.2001), respectively.

These changes have rationalised the accounting of fund sharing between the Centre and the States, eliminating the double counting while estimating Centre’s Fiscal Deficit. Consequent upon these changes, the revenue expenditure of the Central Government had come down on account of reduction of net interest expenses and loans to the States, erstwhile debited from the Consolidated Fund of India. Therefore, it helped the Central Government to reflect fiscal deficit correctly since 1999-2000. Apart from that, the outstanding liability under Small Saving, Deposit and Provident Funds to Central Government have been scaled down from Rs.2,06,458 crore in 1998-99 to Rs. 63,922 crore during 1999-2000 to reflect the actual position.

At the initiation of the Committee, the State Government of Uttar Pradesh had conducted a survey on the ownership of small saving schemes encompassing both the urban and the rural areas. Deposits made in the year 2000-2001 were taken as the basis for the survey. State Government officials like Deputy Directors, District Savings Officers, Assistant Directors, Additional District Savings Officers and Statistical Assistants were assigned with the task of conducting the survey work. Given the fact that the investments are purely personal and in a way, confidential, and that the time limit granted for the survey was short, following parameters were fixed for obtaining the true and representative character of the ownership of small saving schemes in the State.

A. Two representative districts were selected in each of the three geographical region of the state -Western UP, Eastern UP, Central UP in addition to one district from the Bundelkhand region. It is presumed that the results from the selected districts will bring forth the representative character of the ownership of small saving schemes in the State.

B. National Savings Agents having accounts of more than 1000 investors with them were taken as samples. In the selected districts, five agents per district covering the total area (rural as well as urban) was selected as the major source of information regarding the investments and profile of investors. Thus, 35 National Savings Agents were the main source of information for this survey.

C. Investors are categorized as follows:-

1. Farmers - Marginal (Below 2.5 acre land holdings) - Major
2. Landless Labourers
3. Traders
4. Self Employed Persons:- I - Doctors II - Lawyers III - Chartered Accountants
5. Government Servants (Central and State Government)
6. Non-Government Employees:- I - Industrial Labour II - Other Labourers
7. Others (Non-Classified).

D. Security-wise gross collections (amount in Rs. crores) covered in the Survey are as follows.

Security-wise investments as shown above reveals that the major collections are mainly coming from Kisan Vikas Patra, National Savings Certificate (8^th Issue), Monthly Income Scheme, Public Provident Fund, Recurring Deposit Scheme and Savings Bank Deposits Scheme. Retired Govt. Employees Deposit Scheme and National Savings Scheme-92 are found to be relatively unattractive. Therefore emphasis was laid on KVP, NSC (8^th Issue), MIS, PPF, RD, and TD Schemes for further work in this survey relating to the identification of investor profile.

Number of investors and amount mobilised are given in Table 1 and the percentage share of ownership by various categories of investors according to the major small saving instruments is shown in the Table 2.

Following observations can be inferred with regard to the investor profile.

• In terms of the total number of investors, industrial labours tops in terms of aggregate investment in small saving schemes at 26.7 per cent (41.1 per cent of whom had invested in KVP), followed by Traders at 18.7 per cent and Government Employees at 17.3 per cent. In terms of invested amount, however, traders share the maximum amount at 27.9 per cent, followed by Government Employees at 21.8 per cent.
• KVP and Post Office Time deposit is the most popular instrument among farmers in terms of number of investors as well as the amount of invested funds.
• Distribution of investors within the traders as well as their invested funds is most uniform across schemes, although around 50 per of their total investment is confined to Recurring Deposit.
• In terms of number of investors as well as the invested amount within Government employees and the self-employed persons (especially doctors), NSC and PPF turn out to be popular instruments. A considerable number of investors as well as their invested amounts are also confined to Monthly Income Schemes in case of Government employees.