Govt is not managing its finances well

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: Out of the Rs 10,20,838 crore the Centre will spend on in 2009-10, the largest will be on interest. Budget papers show, the government’s interest costs are estimated to rise by 17% in 2009-10 to Rs 2,25,511 crore in this fiscal, up from Rs 1,92,694 crore in 2008-09, mainly due to the massive rise in market borrowings.

This also means the government is not managing its finances well. In 2009, inflation has dipped by 800 basis points. Lower inflation means there should be lower yields on government papers, which in turn means better price for the papers. But as the higher outlay on interest means that has not happened. This could have happened if the government had set in motion the formation of an independent debt management office, which had been promised in budget 2008-09.

This is therefore one of the reasons government’s fiscal deficit, which represents the gross excess of expenditure over revenues, is projected to jump to 6.8% of the gross domestic product (GDP) in 2009-10, up from the revised estimate of 6.2% in 2008-09.

As a result, the Centre’s gross borrowings are estimated to rise to Rs 4,51,093 crore in 2009-10, up from Rs 3,06,000 crore in 2008-09. These funds will be needed to finance expenditure that for the first time will surpass Rs 10 lakh crore. The net borrowings excluding of repayments are pegged at Rs 3,97,957 crore in 2009-10.

Sections in the market welcomed the continuation of the fiscal stimulus in this fiscal, although many people were disappointed the government hasn’t presented a medium term fiscal consolidation programme.

Financial markets tumbled on the news of a bloated borrowings plan that will be needed to fund the deficit. The 30-share Sensex ended down 5.83% at 14,043.40 points on Monday. Yield on the most traded 6.07% 2014 government bond was at 6.46%, up from Friday’s close of 6.23%. The rupee closed at 48.46/47 per dollar, weaker than 47.89/91 per dollar at close on Friday.

At a post Budget press conference on Monday, finance secretary Ashok Chawla said the government will ensure the borrowings happen in a non-disruptive manner.