20 February, 2020
3 Min Read
Syllabus subtopic: Government Budgeting.
Prelims and Mains focus: about the exemptions in this year’s budget and its impact on savings and deficit
News: Getting rid of exemptions under a new tax regime proposed by the budget could make small savings less attractive for individuals and dry up this source of funds for the government.
How do exemptions apply to small savings?
How are the rates of interest determined?
Okay, but how does the government utilize NSSF?
The government uses NSSF as a source of funds for some of its investments through the National Highways Authority of India (NHAI) bonds and also to finance part of its deficit through government securities. NSSF buys these securities and collects the interest on them. Without exemptions in the new tax regime, this steady source of funds may not be available to the government.
How do small savings impact deficits?
Economists has said how state governments till 2003 could borrow from people in the form of postal savings. The rates on postal savings were above the average interest rates and there was no limit on borrowings for the states. The high interest rate led to a 15.2% growth in small savings rates per annum from 1995-2003 compared to 11% nominal growth. This coincided with high state deficits as there was no fiscal discipline and state governments could borrow as much as they wanted through postal savings.
Will a new tax regime bring fiscal discipline?
The removal of exemptions will have implications for the quality of our fiscal statistics. The magnitude of the impact in the short run would depend on how many people switch to the new tax regime. As more people move to the new regime, the Centre will find limited funds in NSSF, which it could earlier tap to finance its deficit or utilize it for off-budget borrowing. Removing exemptions will bring in self-discipline in the way the Centre uses public money.
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