Government borrowing target fails to enthuse market

Bond market, however, happy with the government's commitment to keep deficits under check

Finance Minister Arun Jaitley in his Budget speech said net borrowing for fiscal 2017-18 would be Rs 3.48 lakh crore, substantially less than what the bond market was expecting. 

The bonds, however, did not react much as the market was waiting for the details, especially as the government kept the deficit for the next year more or less at the level the market expected it. The fiscal deficit, at 3.2 per cent of the gross domestic product, is impressive, but then the market anyway expected the government to keep it at 3.3 per cent. 

When details came out and the bond dealers analysed the capital receipt, they discovered that the impressive net borrowing numbers were achieved after taking into account a massive Rs 75,000 crore of buybacks. The buybacks should technically cheer the market, but there is a small glitch. The government generally buys back bonds that are maturing in the next fiscal year. And the buybacks mostly happen at the fag end of the fiscal — in February or March. 

Economists and bond dealers also pointed out that the government has factored in heavy mobilisation of resources against small savings certificates. The Budget of 2016-17 had expected small savings to contribute Rs 22,107.91 crore. But in actuality, the mobilisation this fiscal was Rs 90,376.57 crore. For the next fiscal, the government has keyed in more than Rs 1 lakh crore in revenue through small savings, which could be on the higher side, cautioned economists.  

If the buyback figures are not included, the net borrowing stands at Rs 4.23 lakh crore, which is exactly what the market had expected. Bonds, predictably, did not move much. Net borrowing for the current fiscal was at Rs 4.07 lakh crore, after the government cancelled a bond auction of Rs 18,000 crore in January.

“For the market, the net numbers really ended at Rs 4.23 lakh crore. It all depends on when the government is buying back and when is the maturity,” said Harihar Krishnamoorthy, head of treasury at FirstRand Bank. “If the bonds are maturing within two to three months in the next fiscal, then the entire exercise doesn’t hold much for the investor.”

The yield on the 10-year bond was trading at 6.40 per cent before the Budget began. Soon after the Budget was announced, the yields rose to 6.45 per cent and closed the day at 6.42 per cent. 

The Budget document showed that gross borrowing would be Rs 5.8 lakh crore. Buyback would be to the tune of Rs 75,000 crore and redemptions would be Rs 1.56 lakh crore. 

“Switch”, or replacing shorter maturity with longer tenure maturity, in fiscal 2018-19 would be Rs 25,000 crore. The switch doesn’t impact market as it is an arrangement between the government and a large institution, for example with the Reserve Bank of India.   

If the market was not positively surprised, there was no reason for a negative surprise either. Bond market participants were happy with the government’s commitment to keep deficits under check.

“We have to give it to the government that it is serious about maintaining fiscal discipline,” said Jayesh Mehta, head of treasury at Bank of America Merrill Lynch. 

Jaitley said in his speech that he would maintain fiscal deficit at 3 per cent from fiscal 2018-19 onwards. 

“The Budget’s conservative fiscal stance will not only help boost investor confidence in India’s macro stability, but it is also likely to induce global agencies to relook India’s sovereign ratings. Even an outlook upgrade will attract foreign funds, and thereby help further reduce interest rates,” said Saugata Bhattacharya, chief economist of Axis Bank.  

In the revised Budget for fiscal 2016-17, the government said it would buy back an additional Rs 22,500-odd crore in the present fiscal. The government last week switched with the Reserve Bank of India Rs 37,000 crore of bonds maturing this fiscal with longer tenure bonds.

Illustration: Binay Sinha

In the Budget for fiscal 2016-17, the government did not estimate any buyback or switch programme.  

Govt to punish big-time offenders leaving the country

In his Budget speech, Finance Minister Arun Jaitley mentioned that the government would introduce a law that will make it possible to confiscate the assets of absconders who owe money to banks. The Budget documents did not provide any detail on this, as this was an intent and not related to the Budget or policy issues. 

“There have been instances of big-time offenders fleeing the country to escape law. The government is considering legislative changes, and new law to confiscate [the] assets of such persons,” Jaitley said in his speech.

But this announcement is important as coupled with bankruptcy and other such Acts, this law would give more teeth to the banks to recover their dues. Law enforcement agencies are seeking to extradite Vijay Mallya, the promoter of the now defunct Kingfisher Airlines, and Indian Premier League founder Lalit Modi on charges of financial irregularities. Mallya owes about Rs 9,000 crore to banks and is now settled at the United Kingdom. 

Banks don’t have much option other than approaching the Supreme Court to get rights to all the assets Mallya owns, including shares of his cross holdings in some companies, but nothing much has been realised till now. 

However, according to experts, given that most of the assets of such people are parked overseas, local banks would anyway not recover much in case a promoter is bent on defrauding lenders.