Public Sector Borrowings Spike In First Half Of FY21

Total borrowings across the central government, state governments and public sector enterprises rose to Rs 11.72 lakh crore until Sept. 23, data compiled by Bloomberg Quint showed. This is an increase of 57% over the Rs 7.46 lakh crore borrowed in the first half of the previous financial year.

Central Government Borrowings

The sharpest increase came from the central government, which had to maintain spending despite a sharp drop in revenues.

Gross market borrowings stood at Rs 7.06 lakh crore as of the week ended Sept. 22, which is 73% higher than last year. The government borrowed close to 60% of its expanded borrowing programme of Rs 12 lakh crore.

Borrowings are likely to remain high in the second half as well.

ICRA’s baseline estimate is that the central government’s fiscal deficit will spike to at least Rs 14 lakh crore in FY21 compared to the originally budgeted Rs 8 lakh crore, said Aditi Nayar, principal economist at ICRA Ratings. This suggests that borrowings in the second half may need to be raised by about Rs 2 lakh crore, over and above the Rs 12 lakh crore already planned, Nayar said.

State Government Borrowings

Between April and September this year, state governments borrowed Rs 3.26 lakh crore, an increase of 45% over the Rs 2.25 lakh crore borrowed in the same period last year.

Like the centre, states governments have also seen a shortfall in revenue from their own tax sources and via transfers from the central government.

According to Nayar, the combined state government fiscal deficit this year may settle in the range of 4.25-5.5% of gross statement domestic product. This year, states will also borrow to make up for a shortfall in GST compensation due from the centre. The central government has given states two options on this and discussions are underway.

“After all the state governments communicate which of these two options they would be choosing, the SDL supply could rise appreciably in the coming months,” Nayar said.

According to a Sept. 22 report by CARE Ratings, only seven states have not increased their borrowings substantially from last year.

“Tamil Nadu, Maharashtra, Andhra Pradesh, Karnataka and Rajasthan have been top five borrowing states, accounting for 54% of the total borrowings by state governments so far in the current financial year,” it said.

Borrowings By CPSEs

Among central public sector enterprises, total bond market borrowings rose 24% to Rs 1.4 lakh crore between April and Sept. 22 from Rs 1.13 lakh crore during the same period in the last fiscal, according to data compiled from Bloomberg.

The list of entities include central government-owned companies like NTPC Ltd., Power Finance Corp., Oil and Gas Co. and entities like the National Highways Authority of India and the National Bank for Agriculture and Rural Development among others. In total, 11 central government-owned entities were included.

Impact On Borrowing Costs

In any other year, a surge in public sector borrowing requirements would have pushed up yields materially. This year, borrowings have gone through in a relatively non-disruptive manner as the central bank cut interest rates sharply and flooded the system with liquidity.

That led to yields on the 10-year benchmark bond falling to the lowest in a decade in May this year. Since then yields on government securities have inched up on fears of continued borrowing pressure and higher inflation.

Borrowing costs for state governments also fell together with the decline in central government bond yields.

In recent auctions, however, the spread charged for state bonds has risen due to fear of an increase in supply of such securities in the second half. The spread between 10-year state development loans and government bonds has risen to above 70 basis points from 50 basis points at the start of the month, said ICRA in a report on Tuesday.

Shameek Ray, head of debt capital markets at ICICI Securities Primary Dealership Ltd., said there is uncertainty over how the borrowing strategy put forth by the government will work in addition to the usual higher borrowing in the second half of the year. “While there is still demand for SDLs from insurers, pension funds and banks, the additional demand required to clear the additional supply may come at a higher yield and states will have to bear a higher spreads,” he said.

Public sector enterprises have also benefitted from lower borrowing costs as investors often see them proxies of the government at a time when credit quality risks are perceived to be high.

“While some big and highest rated issuers have already raised large amounts as they found the bond market rates lower than bank rates, middle-rated issuers may have waited for lower rates or for better sentiment for credits. Now with rates having bottomed out and better credit conditions, these issuers too would look to issue out of concern that yields will go up in some time,” said Ray.

He expects credit spreads, over the government security yield, for state-owned firms to be higher in the second half of this year compared to the last six months due to tempering of rate cut expectations, steepening of the yield curve and greater supply of SDLs and corporate bonds.

Note: This story has been updated to correct REC borrowings which stand at Rs 21,563.50 crore so far this financial year. The article had pegged this borrowing at Rs 31,564 crore. The error is regretted.