Budget 2018: Although the Economic Survey sought to explain there was no strict correspondence between the fiscal deficit and borrowings at the central and state levels, bonds sold off sharply on Monday reacting to an observation that a pause in general government fiscal consolidation, relative to 2016-17, could not be ruled out. The yield on the benchmark hit 7.625%, up 14 basis points over Friday’s close. The survey noted that setting overly ambitious targets for consolidation — especially in a pre-election year — based on optimistic forecasts that carry a high risk of not being realised “will not garner credibility either”.
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The survey observed that the bond markets had perhaps not fully factored in the fact that higher market borrowings by states did not reflect higher deficits. On the contrary, about Rs 50,000 crore or 0.3% of GDP of market borrowings had resulted from changes in the composition of financing, away from NSSF borrowings and towards lower-cost market borrowings. “For general government, about Rs. 40,000 crore represents greater market borrowings that is not due to deficits — a fact which markets apparently have not internalised,” it said.