Budget 2022-23: Gross borrowing likely to fall Rs 63.5K crore in FY23

The massive borrowing plan announced by the government in the FY23 Union Budget may get trimmed by Rs 63,500 crore. This is because the Reserve Bank of India, earlier, had announced that the government has opted for conversion or switch of securities with market participants.

The government has decided to switch securities maturing in FY23, FY24, and FY25, and issuing fresh ones of equivalent value. Of the total switch amount, Rs 63,500 crore worth of bonds would mature during the next financial year.

On Tuesday, the government had announced a Rs 14.95-trillion gross borrowing plan for FY23 in the Budget.

“Gross market borrowing for FY23 is pegged at Rs 14.9 trillion, way higher than our estimate of Rs 12.9 trillion and the revised FY22 estimate of Rs 10.45 trillion (plus additional GST-led states' support borrowing of Rs 1.58 trillion),” said Madhavi Arora, lead economist, Emkay Global.

“But the redemption appears still high at Rs 3.78 trillion, implying the Budget has not considered Rs 636.5 billion worth of switches recently conducted to reduce the FY23 redemption pressure. Hence, taking this into account, gross G-sec issuance should ideally be at Rs 14.3 trillion, still a significantly higher print,” Arora said.

Yields on government bonds surged 21 basis points in the two trading sessions after the announcement of the borrowing programme. On Thursday, the yields closed almost flat as compared to the previous session, at 6.89 per cent. The net borrowing number, which is Rs 11.4 trillion, is equivalent to 4.3 per cent of GDP, as compared to 4 per cent in the current financial year.

“For some reason, the gross borrowing number in Budget documents do not account for the reduction in FY23 redemptions due to the RBI switching bonds with the government to the extent of Rs 636 billion. Thus, we now see gross borrowing at Rs 14.3 trillion versus the announced Rs 14.95 trillion,” ICICI Securities PD said in a note.

The bond markets were also disappointed as there was no mention of India’s inclusion in the global bond index in the Budget speech. But tax on capital gains, which India imposes, has been a sticking point.

Ajay Seth, secretary in the department of economic affairs, told Business Standard in an interview that tax exemption was not part of discussions earlier. “When conversations started around the rupee paper being part of global indices, tax exemption was never part of the conversation. That came much later. There is a new demand and that has to be seen from the perspective of the overall taxation philosophy. It can't be to simply facilitate the overseas listing,” Seth said in his post-Budget interview.

The government seems unfazed by the recent spike in bond yields; Seth suggested yields should be compared with the pre-pandemic time.

“As far as bond yields are concerned, one cannot see it from a 2020 or 2021 perspective. These were pandemic years. You have to see what the yields were in a normal year. We have to take that as a benchmark,” he said.