The government attributed the additional borrowings primarily to a R35,000 crore shortfall in the National Small Savings Fund and claimed that these will not overshoot its fiscal deficit target, which is funded through various means.
The extra debt is also necessitated because of a weak cash position, it said.
The news on extra borrowings sent bond yields higher by as much as 12 basis points on Thursday.
We will borrow R2.2 lakh crore in the second half (October-March) of the fiscal year, as compared to the budgeted R1.67 lakh crore, said R Gopalan, secretary, department of economic affairs.
There are also concerns over the additional government borrowings crowding out private credit but these are largely allayed by the fact that demand for credit has anyway been impacted in a slowing economy.
The government is estimating a shortfall of R35,000 crore in the current fiscal in the NSSF, also used to finance the deficit, Gopalan said. There is a switch taking place from NSSF into dated securities, Gopalan said. Budget calculations were made with estimation of R24,000 crore in NSSF.
It (the additional borrowing) is very negative for the bond market. The yield moved up by almost 12 basis points by the end of the day, which is a very big single-day jump, said an economist at a public sector bank. Fiscal deficit would probably inch closer to 5%, he said.
The government's market borrowings are a key figure for the bond market and the credit market. Yield on the 10-year benchmark government bond bond rose to 8.46% on Thursday from Wednesday's close of 8.34%. Rising yields result in lower bond prices.
The bond market is nervous as you can see from the yields. But it is difficult to analyse the exact impact of higher borrowings on fiscal deficit, said Kotak Mahindra Bank chief economist Indranil Pan.
Market players are also worried that the government may be forced to raise borrowings level once again, anticipating a shortfall in the disinvestment proceeds pegged at Rs 40,000 crore for the fiscal. The government has so far been able to raise only Rs 1,100 crore by partially offloading its stake in the Power Finance Corporation.
The bond sales calendar looks likely to stretch up to February. Today's borrowing level obviously does not take into account anticipated shortfall from disinvestment, which means there could be extra borrowings in the coming months, a bond market player said.
Gopalan, however, maintained that the extra borrowing would not crowd out credit availability to the private sector. The finance ministry, in the Union Budget in February, has pegged a gross market borrowings target of Rs 4.17 lakh crore for 2011-12, in order to help bridge its fiscal deficit projected at 4.6% of the GDP. However, the entire year borrowing target now stands at Rs 4.7 lakh crore.
The government has completed borrowings of Rs 2.5 lakh crore in the first half between April and September.
Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said on Thursday that government needs to pursue fiscal consolidation, as fiscal policy has an important role to play in containing inflationary pressures.
He said the government is unlikely to achieve its fiscal deficit target of 4.6% for the current fiscal.