National Small Savings Fund for Air India

Why in news?

Funds with the National Small Savings Fund (NSSF) will now be used to help the struggling state-owned airline, Air India.

What is the decision?

Reportedly, an estimated Rs 10 billion is to be allocated to the airline.
Air India recently failed to pay salaries and also missed payments to various creditors.
These include oil companies, aircraft leasing agencies and mechanical contractors.
It already has a debt of over Rs 500 billion and the government’s efforts to privatise it have not materialised.

What is the government's rationale?

The government wants to keep the liabilities like funding an ailing airline off the Budget balance sheet.
It is also focussed at meeting the fiscal deficit target.
Recently, the government also permitted the NSSF to start lending to central agencies in addition to Air India.
E.g. the Food Corporation of India and the National Highways Authority of India
For the current financial year, the NSSF plans to invest Rs 1.3 trillion in these and other agencies.
Notably, these are areas that would otherwise have required budgetary support.
In other words, instead of the government directly lending to these agencies, it will have the NSSF directly lend to them.
The impact on the overall public sector balance sheet will in effect be the same but the fiscal deficit will appear smaller.

Is it justifiable?

The pool of small savings being used to finance a struggling airline’s working capital raises some concerns.

Certainly, this is not tax revenue and the government is just the custodian of this money.
The government thus has the duty to ensure that this money is invested safely and wisely.
So the decision largely appears to be an irresponsible use of funds.
Even the fiscal deficit target would only be met in name.
It's because the government would still be spending more in excess of its revenue than it had targeted.
The effect on private sector borrowing would largely be the same as additional crowding out would occur.

What are the concerns?

The government seeks to meet its disinvestment target through buyback of shares by public sector undertakings (PSUs).
There is also a suggestion that the RBI reserves be tapped for government expenditure.
These make it clear that the government is relying heavily on sources other than taxes to fund its spending.
This is problematic for two reasons:

it is often a less productive use of the funds in question and involves a violation of fiduciary duties
using such off-balance sheet methods undermines the effort towards fiscal consolidation

The finance ministry must thus reconsider its approach towards managing the financial resources and meeting the targets.

Source: Business Standard