Government Unlikely To Revise First-Half Borrowing Plan Despite Covid Hit
The Finance Ministry stands in the North Block of the Central Secretariat building in New Delhi, India. Photographer: Prashanth Vishwanathan/Bloomberg 

Government Unlikely To Revise First-Half Borrowing Plan Despite Covid Hit

The Indian government does not plan to revise its borrowing programme for the first half of the current financial year despite fears of a deadlier second wave of the pandemic dampening revenue collection, a finance ministry official told BloombergQuint on condition of anonymity.

Out of the Rs 12.06 lakh crore in gross borrowing planned for FY22, the government intends to borrow Rs 7.24 lakh crore in the first half. The borrowing from April to September will be 60.06% of the total market borrowing for the fiscal.

Covid infections soared starting April and prompted a number of states to announce lockdowns even though nationwide restrictions were averted. Economists expect a sequential contraction in the April-June quarter, but expect it to be less extreme than what was seen during the corresponding quarter last year.

Revenues are good as of now and so we do not require changes in the first-half borrowing plan so far, the official quoted above said. The economic impact of the second wave is expected to be short-lived and, consequently, the fallout on revenues will be limited, the person added.

Data for goods and services tax collection is only available till March. GST revenue for March, collected in April, was around Rs 1,41,384 crore, However, e-way bill collections for April fell 15% compared with March, suggesting a slowdown, according to data from Standard Chartered Research. In May, the average daily volumes for e-way bills generated have fallen further.

Economists do not share the government’s optimism on revenue, although they do not see a need for a change in the borrowing plan yet.

“Revenues will be impacted even though the targets were conservative to start with. There will be some impact simply because of the severity of the infection and the impact on the economy will last a good 5-6 months before we see any kind of rebound,” said Abheek Barua, chief economist at HDFC Bank. This should not impact the government’s borrowing plan for April to September, although the number for the second half may have to be increased, Barua said.

Madan Sabnavis, chief economist at CARE Ratings agrees.

“We haven’t seen any discernible distortion coming in the way of their expenditure and expenditure can always be deferred to the second half. Therefore, there may not be any need for the central government to borrow more money in the first half,” Sabnavis said.

Sabnavis sees a definite impact on government revenues, including on GST collections and the corporate tax mop-up. The budget estimate for tax collections for the current financial year is Rs 22.17 lakh crore.

An email sent to the Finance Ministry seeking details on Monday was not answered.

Borrowing Costs Under Check

The bond markets have been volatile since the Union Budget was presented but the cost of borrowing remains in check, the official quoted above said.

While there has been speculation on the Reserve Bank of India’s attempts to keep the 10-year yield below 6%, according to the official, the government is not focused on any particular level. It just wants to avoid abrupt moves.

There should be an orderly evolution of yield, the official said. It is not about keeping it below 6% or at 6% but there should not be any abrupt changes in yields to ensure a smooth borrowing programme, the person said. That's what the government has suggested to the RBI, the official added.

According to Care Ratings, the weighted average yield so far this year has been 6.08%, significantly lower than 7.4% in the corresponding seven auctions of the previous year.

So far in the current financial year, the central government has raised Rs 1.84 lakh crore, which is 15.3% of its budgeted borrowing for the year. The total borrowings by the centre so far are 55% more than the same period last year.

The borrowings, however, have not been entirely smooth. The central bank has cancelled auctions, particularly of the benchmark 10-year bond, to ensure yields don’t move higher.

The RBI has rejected bids for the 10-year benchmark 5.85%, 2030 bond on April 16 and May 14, and for the 5.63%, 2026 bond on Apr 23. On April 9, in the first weekly auction of the current fiscal, the RBI devolved Rs 10,296 crore of the new 2026 bond on primary dealers out of the Rs 11,000 crore up for sale.

The recent devolvements and rejections in the weekly auctions were just on account of a "disconnect" between what the market and the central bank believed to be the correct level of yield on government securities, the official said.

To make up for any lost borrowings in certain weekly auctions, the government plans to use the greenshoe option in weeks when bond sales are going through smoothly. They have also chosen to borrow more via securities where demand and pricing is better. Data compiled by BloombergQuint shows that Rs 22,848 crore has been borrowed via the greenshoe option so far.

The government hopes the RBI will continue doing open market operations for liquidity management and G-SAP for demand management, the official quoted above said. This should help the market and the government’s borrowing. Apart from this, the higher-than-expected surplus transfer of Rs 99,122 crore to the government for the nine months ended March 31, 2021, should also aid the government's finances, the official said.

RBI Governor Shaktikanta Das earlier this month announced that the central bank will buy Rs 1 lakh crore worth of government bonds in the ongoing quarter. Of this, the central bank has already purchased bonds worth Rs 60,000 crore.

Also read: RBI Panel Wants States To Build Larger Rainy Day Funds

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