The Centre is mulling showing recapitalisation bonds worth Rs 1.35 lakh crore as a “below-the-line item” to exclude its impact on fiscal deficit, a senior official told FE. While the annual interest costs of such a move will be part of its Budget, the total bonds to be issued will be its off-Budget liabilities. So while such a move will raise the centre’s debt burden, it won’t drive up its fiscal deficit substantially. “The issue is still being debated. But we are also exploring options how it can be done (accounting it as a below-the-line item) and the likely consequences. The IMF (International Monetary Fund) framework on this account seems better to us,” said the official. Chief economic adviser Arvind Subramanian has pointed out that while under India’s existing convention these bonds would add to the deficit, as per IMF’s “economically more intuitive” convention, such bonds are “below-the-line” financing and are not counted as part of deficit.
Some analysts said while the bonds could be issued by either the government or the Reserve Bank of India, public-sector financial institutions like LIC or cash-rich PSUs such as ONGC or NTPC may be asked to subscribe to these bonds. Some others, however, said these bonds could be subscribed by the banks. NR Bhanumurthy, professor at the National Institute of Public Finance and Policy, said although the government’s direct budgeted outgo may be restricted to servicing the debt, any move to ask PSUs to subscribe to such bonds could result in a reduction in non-tax revenues. This is because the transfer of profits/dividends of PSUs to the government will then fall to that extent. Moreover, the move would also drive up the interest rates in the market, which will also raise the cost of the government’s own borrowing. So the combined direct and indirect impact of this decision can be effectively gauged only later, Bhanumurthy said.
The government’s non-tax revenues (including dividend and profits of PSUs) are budgeted at Rs 2,88,757 crore for 2017-18, against Rs 3,34,770 crore in the last fiscal.“This (issuance of bonds) is also likely to be liquidity non-disruptive and hence have minimal impact on the liquidity conditions and the market yields. The applicability of SLR status of these bonds remains to be seen, which could have marginal impact on market yields,” Karthik Srinivasan, group head (financial sector ratings) at Icra said in a report. Holding that the larger-than-expected recapitalisation commitment is growth positive, Nomura’s Sonal Varma and Neha Saraf said in a report that the government could announce a fiscal slippage to 3.5% of GDP in FY18 against its target of 3.2% sometime in December, because of its front-loaded spending and lower revenues. According to the IMF convention, said Subramanian, these bonds are a capital transaction, and their issuance does not increase directly demand for goods and services and has no inflationary consequence. “It is a capital transaction because on the one hand it increases the government’s liability but it also increases its assets. The overall or net financial position of the government remains unchanged,” he explained.