Interim Budget: Gross market borrowing music to ears of bond market

The Interim Budget for FY25 on Thursday continued to focus on “four major castes” in India — poor, women, youth and farmers — and fulfilling their need, aspiration and welfare remained the government’s highest priority. But not at the cost of fiscal discipline.

Finance Minister Nirmala Sitharaman walked the talk and didn’t deviate from the path of fiscal consolidation. The revised estimate of fiscal deficit for the current financial year is 5.8 per cent of gross domestic product (GDP), 10 basis points less than the earlier estimate. A hundred basis points make one percentage point.

For FY25, the target for fiscal deficit is 5.1 per cent of GDP.

In the last Budget, besides sticking to the 6.4 per cent estimated fiscal deficit of FY23, Sitharaman had charted out the fiscal glide path by pegging the fiscal deficit at 5.9 per cent in FY24. She had also reiterated her comment to bring down the fiscal deficit below 4.5 per cent by FY26. The latest Budget statement reassured us that she would not like to deviate from this. Both the figures — estimated fiscal deficit for FY24 and FY25 — are marginally better than what most analysts were expecting.

Following this, the estimate for the market borrowing programme for the next fiscal year is on the line of what the treasury managers of banks were expecting. The gross market borrowing for the year is estimated at Rs 14.13 trillion; and, net of redemptions, the net borrowing estimate is pegged at Rs 11.75 trillion — music to the ears of the bond market. The 10-year bond yield dropped from 7.11 per cent to 7.05 per cent after the finance minister’s Budget speech.

(Since net borrowing is estimated at Rs 11.75 trillion and redemptions of bonds for FY25 are to the tune of Rs 3.61 trillion, the gross borrowing should have been Rs 15.36 trillion. But the Budget estimate is lower. The difference of Rs 1.23 trillion is being made up from the flow of the so-called goods and services tax compensation pool.)

In the current year, the gross market borrowings are estimated at Rs 15.4 trillion, and the net borrowing at Rs 11.8 trillion — the highest-ever government borrowing programme.

Since the Covid pandemic affected FY22, the government borrowing programme has been on the rise to take care of the fiscal deficit.

For instance, in FY20, the gross borrowing of the government was Rs 7.1 trillion. The amount was almost doubled to Rs 13.7 trillion in FY21. The next year, it dropped to Rs 11.3 trillion but rose to Rs 14.2 trillion in FY23. In four years since FY21, the total government borrowing has been Rs 54.6 trillion — more than the total outstanding borrowing of the government in the last decade.

The Reserve Bank of India (RBI), the merchant banker of the government, has done a wonderful job of managing the massive borrowing programme during the pandemic and its aftermath. To its credit, the Indian central bank has not bought any government bonds through open market operations since September 2021, burdening its own balance sheet. It also didn’t allow a rising bond yield to disrupt the market. From 6.14 per cent, the 10-year bond yield rose to 7.62 per cent in June 2022 — its highest level in the current cycle. On Thursday, it closed at 7.060 per cent.

In June, India’s inclusion into the JP Morgan Emerging Market Bond Index will take effect. This will strengthen the demand for bonds and ease the burden on the banking system. We will see a two-fold impact of this — the banks will be able to free up money to support credit growth, and the bond yield will drop further.

Of course, the first rate cut by the RBI at the end of the current cycle will help the government to lessen its borrowing cost. That may not happen too soon. But it will be interesting to see how RBI Governor Shaktikanta Das responds to the finance minister’s signal. Nobody expects a rate cut and even a change in the stance of the monetary policy next week, but will the RBI sound less hawkish on February 8 at the end of the last meeting of its Monetary Policy Committee in FY24?

For the record, the capital expenditure for FY25 is being increased by 11.1 per cent to Rs 11.11 trillion. I am curious to know whether Sitharaman is a believer in numerology! How does one explain the estimated capex of Rs 1,111,111 crore?

Incidentally, in her 24-page, 58-minute speech, Honourable Prime Minister Narendra Modi was referred to eight times; ditto about the term “reforms”.

The Budget spoke about 12 per cent growth in tax revenue and 10.5 per cent nominal GDP growth (Rs 32,771,808 crore or close to $3.9 trillion) for FY25. Das has been talking about 7 per cent real GDP growth in FY25.

Let’s wait and watch for the second act of the play on Indian economy on February 8. There hasn’t been any dramatic moment in the first act (the Budget) but nobody would complain. It’s par for the course as long as the figures don’t change in the main Budget, which will be presented after general elections.

Writes Banker's Trust every Monday in Business Standard. 

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