Tricky terrains of fiscal deficit financing

Written by Santosh Tiwari | Updated: Dec 10 2013, 08:53am hrs
With the battle-lines now drawn for the next Lok Sabha polls, the finance ministrys main job over the next few months would be to ensure that the fiscal deficit red line for FY14R5,42,499 crore or 4.8% of GDP fixed in the budgetis not crossed. And in all probability, despite tax collections being sluggish, finance minister P Chidambaram would achieve this goal when he presents the fiscal numbers for FY14 in the interim budget in February next year. But the actual picture would be clear only when the new government at the Centre will present the full budget for FY15. And going by the historical data put out by the finance ministry last week on the government debt situation, managing fiscal deficit would require hard policy decisions.

Two clear messages to be picked up from the way gross fiscal deficit (GFD) has been financed over the years are: the space for funding populist programmes through budget is limited and there is a need to seriously look at increasing the funding from countries like Japan for infrastructure development.

The finance ministry handbook, first of its kind, which the ministry says will be updated yearly with more historic data, has outlined how the financing pattern of the central governments GFD has become increasingly market-oriented and the share of non-marketable sources such as small savings, provident funds and reserve funds has declined. Apparently, financing of GFD at present is mostly through market borrowings.

And this has combined with the governments borrowing requirements going up to meet the financing needs of economic development.

This has led to the increasing trend of primary issuance of dated securities and treasury bills of the central government. And on their part, the government and RBI have tried to mange the borrowings efficientlythe turnover in the secondary market has increased substantially contributing to the liquidity in the secondary market for government securities. These securities are predominantly held by the commercial banks and RBI and provident funds have also started increasing their share.

The GFD rose from R1,408 crore in 1970-71 to R8,299 crore in 1980-81, and then to R44,632 crore in 1990-91 and R1,18, 816 crore in 2000-01, and it was R5,20,925 crore in 2012-13. Market borrowings financed 17% of the GFD in 1970-71, which rose to 32.28% in 1980-81, and 61.8% in 2000-01. And in 2012-13, the government financed 97.41% of the GFD through market borrowings.

On the other hand, the contribution of small savings in meeting the central governments GFD financing needs reduced to 1.65% in 2012-13 from 7% in 2000-01 and 13% in 1970-71. Similarly, state provident funds, which financed 6.4% of the GFD in 1970-71, were used to finance only 1.91% of the GFD in 2012-13.

Then, external sources utilised for funding GFD came down from as high as 23.57% in 1970-71 to 15.43% in 1980-81 and then to 6.31% in 2000-01, and in 2012-13, it stood at mere 0.42%.

Here, of the total sovereign external debt of R3,32,004 crore at the end of March 2013, Japans share is the biggest among the individual countries at R73,120 crore even though it has gone down from R76,401.14 crore the previous year. The sovereign debt from Germany, at number two spot, at the end of March 2013, was R13,826 crore. Clearly, with Japan in the process of shifting its focus from China, there is an opportunity for India to capitalise on this by expediting the projects like the freight corridors. Going by the finance ministry officials, the ministry has no objection to any particular type of loan from the Japanese agencies for the infrastructure projects, tied or untied.

All told, the best that the UPA government can do in the next few months before going into the elections is keep market borrowings at the minimum and push investments to improve fiscal management.