Questions about borrowing

The funding need can change materially

The government announced its borrowing plans for the first half of the financial year on Tuesday. It intends to sell bonds worth Rs 4.9 trillion in the first half of 2020-21, which is 62.5 per cent of the full-year borrowing target — broadly in keeping with its schedule last fiscal year. It would be interesting to see how the bond market reacts in the coming days. Given the economic situation and its potential impact on the fiscal position, the government’s borrowing needs may change significantly. It is possible that some concerns will build up, particularly on matters of transparency. After all, this comes at a time when market watchers such as Fitch are suggesting that the government’s fiscal deficit will be pushed to over 6 per cent of gross domestic product, following the coronavirus pandemic. Even a lower number would entail a significant fiscal slippage. Market participants will put together the unchanged borrowing schedule with the claimed coronavirus relief package, as well as worrying numbers about tax revenue, and see how they fit together.

The Union Budget mathematics also depended upon a Rs 2.1-trillion disinvestment target, which was always difficult but under the current circumstances looks unlikely. Who will buy Air India today? Most airlines globally will do well just to survive this crisis if it continues for as long as some fear. However, many will be reassured that amid widespread capital flight, the government remains committed to expanding foreign access to the government securities market as announced in the Budget. This will also relieve some pressure from the domestic bond market.  

Meanwhile, the Reserve Bank of India (RBI) has announced that it is increasing its limit for short-term credit to the Union government — “ways and means advances” — to Rs 1.2 trillion for the first half. The equivalent figure for the first half of last fiscal year was Rs 75,000 crore. It is possible, therefore, that the government will rely on this form of short-term credit to get it through at this moment. The central bank has done well to increase the limit as it will help the government to tide over this difficult period when revenue collection is likely to suffer, and it would need to make the necessary expenditure. But it is important to note that this is just a short-term measure and does not address the revenue concerns. For instance, the goods and services tax collection for March fell significantly short of target. Both direct and indirect tax collection is likely to suffer going forward due to the sudden stop in economic activity.

Therefore, the big worry is that the government might turn to the RBI and expect monetisation of its additional spending. Even if the inflationary impact at this moment may not be a great concern, this would still be a bad idea. India can be proud of having moved away from automatic deficit monetisation, which is a major institutional reform and enables the deepening of financial markets as well as heightens government accountability and transparency. There must be no backsliding on that count. Any move in this direction will dent market confidence with wider consequences. The first casualty will be India's plan to further open up its debt market to foreign investors.