The government also sought to accommodate market concerns through floating-rate bonds, bonds with embedded options etc.
However, in the back-drop of the prevailing drought conditions in the country, the government looks like it is exceeding its borrowing target.
In FY03, the government has targeted gross tax collections of Rs 235,800 crore, which translates into a growth of 30.2 per cent over actual collections in FY02.
Says I-Secs assistant vice president, Sanjeet Kumar Singh: Such a growth rate is unattainable in an economy where nominal growth in GDP is expected to be in single digits. Moreover, the bulk of the indirect taxes comes from the industry and despite the recent upturn in industrys fortunes, expecting a strong performance is too optimistic.
Going forward, deficient monsoons and possible resumption of global weakness are going to be additional risk factors for the industry to contend with. In such an environment and considering the budget tax figures, a significant shortfall in the target is expected. Tax collections this year so far have been encouraging due to recovery in the industry.
During the period April-July, total taxes have been Rs 50,232 crore, representing a growth of 17.4 per cent on a year-on-year (YoY)basis. Direct tax performance has been quite robust and collections here have gone up 22.6 per cent on a YoY basis. Indirect collections have grown by 15.8 per cent during the same period.
However, warns Mr Singh: The drought relief measures are sure to add to the budgeted expenditure figure. Thus as far as the overall fiscal picture is concerned, it will suffer from the double whammy of revenue shortfall and extra expenditure.
Traditionally, the government has always overshot the borrowing programme. So it would be reasonable to believe that they will this time around also. However, this might be limited to the extent of disinvestment, says IndusInd Banks senior vice-president, head-treasury, Sharukh Wadia.
UTI Banks vice president and chief dealer (money & forex), RVS Sridhar also agrees with Mr Singh and Mr Wadia.
Mr Sridhar also took the liberty of saying that the government is likely to overshoot by about Rs 20,000 crore given the poor industrial climate. There are underlying worries that tax inflows may slow down though there is no evidence presently. The government may also look at spending more in order to boost infrastructure or for drought relief, said Mr Sridhar.
The spur in has helped the RBI to mop up this huge amount. The borrowing programme has, in turn, helped to keep liquidity comfortable since the bond issues mainly followed government spending as indicated by exceeding ways and means advances (WMA) levels. Though it is still very early to predict, we still have to see what impact the drought has had on the economy. But, interest rates are expected to remain stable to soft, opines PNB Gilts managing director, Arun Kaul.
Mr Kaul adds that the government has already finished borrowing around 60 per cent of its targeted amount and with the upcoming auction, it should be able to reach around 70 per cent.
The RBI is scheduled to borrow Rs 7,000 crore on August 27 by a twin-bond auction which includes the first 30-year bond to hit the domestic government securities market.
It surprised the market by announcing an auction of a new 30-year bond worth Rs 2,000 crore. This is along with the scheduled 15-year bond for Rs 5,000 crore. The RBI also reduced the total auction amount to Rs 7,000 crore from the scheduled Rs 8,000 crore.
Judging by the borrowing pace, overshooting of the budgeted amount in the fiscal poses the greatest threat to bond yields in the latter part of this year. Bond yields have been quite low ever since the RBI advocated softening of interest rates. Some even feel that it has bottomed out. Says Mr Singh: Right now, there is an expectation in the market that the central bank will reduce the Bank Rate and repos rate in the coming months in order to cushion the impact of the deficient monsoons on the economy. If the rate cuts do materialise, the 10-year yield is sure to test seven levels.
To sum it up, the broad theme has been and will continue to be that the borrowings will be conducted in such a manner that the market sentiment does not get adversely affected.