Market reliance: Govt in a fix over raising H1 borrowing target

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May 4, 2020 1:01 AM

The central government will likely ramp up market borrowing in the second half of this fiscal, but may be forced to stick to its target for the first half at the moment.

Adhering to the FRBM-mandated fiscal deficit ceiling of 3% of GSDP, Odisha has pegged its gross borrowing at Rs 24,450 crore and net borrowing at about Rs 18,000 crore for FY21.This is despite the increasing need for boosting productive expenditure through a stimulus package to blunt the Covid-19 impact, despite faltering revenue mop-up.

The central government will likely ramp up market borrowing in the second half of this fiscal, but may be forced to stick to its target for the first half at the moment. This is despite the increasing need for boosting productive expenditure through a stimulus package to blunt the Covid-19 impact, despite faltering revenue mop-up.

Nevertheless, from tapping multilateral institutions more vigourously to getting the central bank to print more money, the Centre is considering a raft of proposals to finance its fiscal deficit.

Fiscal deficit will shoot up sharply from the FY21 target of 3.5% of GDP, a source told FE. Just the tax shortfall in FY21 is expected to be at least Rs 2 lakh crore, or 1% of GDP.

The Centre has already decided to front-load expenditure, having pegged its gross market borrowing for the first half at 62.6% — or Rs 4.88 lakh crore — of the FY21 budgeted target of Rs 7.8 lakh crore, including the repayment of loans. Net market borrowing for FY21 is pegged at Rs 5.36 lakh crore.

There is an apprehension that if the Centre raises its borrowing at the moment, it will crowd out the market that is increasingly turning risk-averse and further drive up the cost of funds for cash-starved states who are at the forefront of battling the pandemic, said the source. While Opposition leaders like former finance minister P Chidambaram have suggested that the centre borrow at cheaper rates (because it can) and on-lend to states to help them tide over liquidity constraints, a decision on any such proposal is yet to be made.

As such, on April 7, in the first instance of the auction for state development loans (SDL) this fiscal, nine states had to issue 10-year bonds at yields between 7.80% to 8%. Investors sought a spread of 140-160 basis points above the central government bond yield of 6.4% for the same tenure. Kerala, which offered 15-year securities to raise Rs 1,930 crore, would pay as much as 8.96%, the highest rate by any state. While the yields for some states have since eased, these are still too high for comfort.

While the combined fiscal deficit of states in FY20 is seen at breaching the 2.6% (of GDP) target, several states are now asking for the FRBM forbearance in FY21 to raise the deficit to even 5%. Therefore, a section of the central government believes that any decision to hike market borrowing can be taken around August or September, based on a more precise assessment of the spending requirements and revenue inflows, and the borrowing for the second half may be accordingly calibrated.

Any move to resort to deficit financing by getting the central bank to print more money will be finalised only around October-November, when the government reassesses its finances for the revised estimates for this year’s Budget.

Moreover, while the central government may always look at raising its reliance on the National Small Savings Fund (NSSF) window, in sync with the trend in recent years, there is a fear that, given the current income loss, many people will tend to withdraw more from small savings fund, shrinking the net kitty. The NSSF is already projected to finance as much as 30.1% of the deficit in FY21, not far from the record 31.3% in the last fiscal.

The source said, given these issues, the Centre is considering other routes of financing, including borrowing from multilateral institutions like the International Monetary Fund (IMF), World Bank, New Development Bank (NDB) and Asian Development Bank (ADB), more aggressively.

ADB has announced that it would extend assistance worth $2.2 billion to India to help it fight the pandemic. Recently, finance minister Nirmala Sitharaman impressed on the NDB to enhance its emergency financing facility. “(NDB) has financial capacity to enhance the emergency facility up to $10 billion for price-related assistance. Therefore, based on the demand from member-countries, this facility should be enhanced,” she said.

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