Elephant in the room: Here is how the government borrowings crowd out private investment

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Updated: July 30, 2019 8:40:10 PM

Fiscal Deficit: Market borrowings account for almost 90% of the total loans taken by the government.

RBI, Government Borrowing, G-Secs, T-bills,The Union government’s gross marketing borrowings have jumped by over 52% in first four months of this fiscal.

The Union government’s borrowing in the current financial year is expected to touch an all-time high of over Rs 7 lakh crore, an 11 per cent jump over the last fiscal. The gross market borrowings of the Union government jumped by more than 52% between April and the second week of July this year, according to the latest RBI data. This huge borrowing puts pressure on markets and squeezes the amount of money available to the private sector and retail borrowers. The massive amount of government borrowings to finance its interest payment obligations and other social welfare measures are often blamed for poor credit availability to industry and other productive sectors of the economy, leading to slower GDP growth.

According to the latest official data, the Union government raised Rs 5.71 lakh crore in 2018 while state governments collectively raised Rs 4.78 lakh crore from the markets. The total gross borrowing of both the Union government touched Rs 10.49 lakh crore last year.

The Union government mostly borrows from the markets by issuing dated government securities called G-Secs and it meets it short term requirements by issuing treasury bills called T-bills.

“Public sector banks invest heavily in government papers,” said a top former officer of Reserve Bank of India.

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According to the Reserve Bank of India, the Union government’s gross borrowing between April and July 12 this year was Rs 2.38 lakh crore, an increase of 52.5% over the same period last year.

“Government papers are considered the safest investment option by the top management of public sector banks that leaves little money for private sector, particularly small and medium enterprises,” the former RBI official told Financial Express Online.

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The Union governments gross market borrowings accounted for almost 90% of its total borrowings last year. If the Union government follows the same pattern of borrowings this year then its gross market borrowings in FY 2019-20 will touch a record of Rs 6.33 lakh crore.

Between April and July, the total gross market borrowings of state governments increased by only 13%, from Rs 91,000 crore to Rs 1.029 lakh crore while the Centre’s gross market borrowings during the same period jumped from Rs 1.56 lakh crore to Rs 2.38 lakh crore, an increase of Rs 82,000 crore.

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