Modi Increases Reliance on Costly Small Savings to Fund India Budget

(Bloomberg) -- Prime Minister Narendra Modi’s government is increasingly tapping citizens’ small savings to fund India’s budget plans, a costlier method as traditional avenues face a glut of debt.

The administration estimates it will borrow about 5 trillion rupees ($69 billion) in the year through March 31 from this pool meant to support households and pensioners, double the 2.5 trillion rupees initially budgeted. Even that’s a steep rise from almost nothing under previous governments.

The increased reliance may eventually prove costly. The federal government pays about 8% for 10-year small savings, compared with the 6% yield on a sovereign bond of similar maturity. The higher rates on a competing product limit how steeply banks can cut deposit -- and consequently lending -- rates, hampering monetary transmission.

Interest costs are budgeted to account for 20% of total expenditure in the year starting April 1 -- up from 18% estimated in the previous year -- even as total borrowing is projected to dip.

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