The finance ministry on Thursday said the government would borrow an additional Rs 52,800 crore from the market over the Budget target in the current financial year, sending bond yields higher. It, however, said the increase in borrowings would not affect the Centre’s fiscal deficit target of 4.6 per cent of the GDP during 2011-12.
The announcement of issuance calendar for second half led to a jump in the yields on the ten-year benchmark government bond by 10 basis points. It closed at 8.44 per cent, as the additional borrowing was much higher than market expectations.
Actually, the additional borrowings are more than Rs 40,000 crore. They are targeted to be achieved from disinvestment of public sector units. This, many say, will be difficult to meet in the current market scenario. The government, though, is hopeful. It has, in fact, attributed increased borrowings to cash problems.
The government will now borrow Rs 4.7 lakh crore in 2011-12, against the earlier target of Rs 4.17 lakh crore, because of a lower cash balance and dip in collections from small savings schemes due to better interest rate offered by banks to depositors. Budget calculations were made with an estimate of Rs 24,000 crore in the National Small Saving Funds (NSSF), but it dipped by Rs 35,000 crore.
On Thursday, Economic Affairs Secretary R Gopalan said the government was increasing the gross borrowings by Rs 52,800 crore for the second half. “The reason is a dip in the small savings collection,” he told reporters after a meeting with officials from the Reserve Bank of India to decide the borrowing calendar for October 2011-March 2012.
In the first half of the ongoing fiscal (April-September), the government has borrowed Rs 2.5 lakh crore through dated securities, which is 60 per cent of the total budgeted market borrowing. In the October-March period now, the scheduled borrowing would be Rs 2.2 lakh crore. The net borrowing will be around Rs 4 lakh crore for the entire fiscal. Last year, the government had borrowed Rs 4.37 lakh crore.
Gopalan stressed the increased need to go for dated securities, instead of depending on small savings, as the government had to bridge its fiscal deficit. “There is a switch taking place from the NSSF into dated securities. Also we need to work to shore up the cash balance. It has nothing to do with fiscal deficit computation. The target of fiscal deficit remains unchanged,” he said.
“The borrowing calendar has been programmed in such a way that there is enough credit for the private sector.”
Earlier in the year, Finance Minister Pranab Mukherjee had said borrowing in the year would not expand the target, and the government would ensure that the private sector was not elbowed out of the market.
The government’s expenditure has been increasing due to a higher subsidy burden, whereas prospects on revenues receipts don’t look bright. It has raised only Rs 1,144 crore through disinvestment this year, against a target of Rs 40,000 crore. Growth in advance tax collections from top 100 companies came down from 19 per cent in April-June to 9.9 per cent in July-September quarter.
The finance ministry has taken measures to cut expenditure and restrict fiscal deficit within Budgeted limits. It had issued instructions to all government departments to cut all unavoidable expenditure, including seminars and conferences at five-star hotels or abroad, purchase of new vehicles, foreign travel, appointment of consultants and reaction of new government posts.
On Thursday, as the yields on the ten-year benchmark government bond jumped by 10 basis points, many players found the borrowing plan for second half surprising and disappointing. “It was expected that government will borrow additionally, but we never though it would be to this extent,” said Nirav Dalal, managing director-debt capital markets, financial markets, Yes Bank. “There were hopes that the government will try to stay within limits by curtailing expenditure.”
Market participants expect the yields could inch up further next week. “Yields may go up to 8.48-8.50 per cent because of higher borrowing coupled with expectations of another rate hike of 25 basis points next month,” said Pawan Bajaj, general manager, Bank of India. The RBI is slated to announce the second quarter review of monetary and credit policy on October 25.
From October onwards, the government will borrow an average of Rs 13,000 crore every week as compared to the average weekly borrowing of Rs 11,000 crore in the first half. “In terms of liquidity,” Bajaj said, “the market will be able to absorb Rs 1,000 crore of additional borrowing every week, though the cost of borrowing will go up.” Also, in absence of higher credit growth this year, the government may find room to fund its needs from the market.