Latest government documents show that in fiscal 2009-10, the National Small Savings Fund will earn only Rs 8,500 crore from PPF. The receipts in post office schemes & certificates and PPF will add up to just Rs 25,000 crore, despite the inducement of a high 8% rate of interest. This too is higher than the revised estimates for 2008-09. PPF receipts were just Rs 6,100 crore then, and the combined inflow into all schemes was Rs 16,500 crore.

In contrast, total deposits in all mutual funds have touched Rs 6,64,450 crore as on May 31, 2009. Mutual funds give no assurance of a fixed rate of interest. The numbers are expected to be shared in the finance minister's discussions with the board of RBI on Saturday.

The finance minister has, therefore, tasked the 13th Finance Commission to suggest ways to enable states borrow more from the market rather than depend on NSSF.

The recourse to market borrowings will reduce the states’ dependence on small savings funds as a key resource to bridge their deficits. They are expected to borrow Rs 1, 26,000 crore in 2009-10, out of which they raised only Rs 20,000 crore in the first quarter, as per an Axis Bank research note.

More market borrowing will also potentially help the Centre to lower interest rates on small savings eventually. The market borrowings are also expected to lead to greater fiscal discipline by states, encouraging them to streamline their debt.

The states’ borrowing and the Centre’s estimated net market debt of approximately Rs 4 lakh crore in 2009-10 could, however, crowd out private investment.