India Raises FY21 Gross Borrowing Target To Rs 12 Lakh Crore
The North Block of the Central Secretariat building, which houses the Ministries of Finance and Home Affairs, stands in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

India Raises FY21 Gross Borrowing Target To Rs 12 Lakh Crore

The Indian government has raised its gross borrowing programme for the current financial year sharply as it seeks more funds to deal with the economic fallout of Covid-19.

In a circular issued on Friday, the government said that the gross borrowing target for the year has been raised to Rs 12 lakh crore from the budgeted Rs 7.8 lakh crore.

The increase in borrowings has been done in consultation with the Reserve Bank of India and has been necessitated on account of the Covid-19 pandemic, the government said.

It did not provide any further details on the financing of the deficit or whether the RBI will step in to buy government securities directly or indirectly.

The RBI has adequate tools to manage the bond yield curve using open market operations, the government’s principal economic adviser Sanjeev Sanyal told BloombergQuint.

Revised Borrowing Plan For H1

Together with the indicated increase in total borrowings for the year, a borrowing calendar for the remainder of the first half of the fiscal year has been released.

In total, in the remained of the first half of the fiscal year, the government will borrow Rs 6 lakh crore from the markets. The government had earlier planned to borrow Rs 4.88 lakh crore in gross market borrowings for April-September. The auction size for each weekly auction goes up to Rs 30,000 crore from the week of May 11.

The maturity profile of issuances during the first half is as follows:

  • Rs 30,000 crore via 2-year bonds
  • Rs 1.2 lakh crore via 5-year bonds
  • Rs 1.8 lakh crore via 10-year bonds
  • Rs 1.1 lakh crore via 14-year bonds
  • Rs 70,000 crore via 30-year bonds
  • Rs 50,000 crore via 40-year bonds
  • Rs 40,000 crore via floating rate bonds

The RBI can exercise a green shoe option to retain an additional subscription of Rs 2,000 crore. It can also modify the borrowing calendar as needed, the circular said.

Also read: Monetisation Neither A Game Changer Nor A Catastrophe, Says Raghuram Rajan

Impact On Bond Markets

The surge in planned borrowings will lead to an increase in yields unless the RBI steps in to monetise the deficit by buying bonds directly or conducts large bond purchases under its open market operation programme.

“The upward revision in the Government of India’s borrowings for the remainder of FY21, although sharp, was inevitable given the estimated extent of revenue loss following the lockdowns related to the Covid-19 pandemic,” said Aditi Nayar, principal economist at ICRA. “Higher borrowings are likely to push up yields, unless open market operations or other instruments are deployed by the RBI to absorb a part of the higher issuance, and crowd out borrowings by state governments and corporates.”

“I think the yield curve on longer tenure bonds will steepen and move upwards, whereas shorter tenure bonds will be supported by the RBI and some domestic investors who can hold these papers,” said Pankaj Pathak, fund manager at Quantum Asset Management.

“This was expected but it will have a slightly negative effect on the bond markets since the expectation was that the RBI would start monetising government debt. Now we know that additional bonds will come to the market, the RBI has to either monetise maybe not through primary markets but in the secondary markets through open market operations,” Pathak added.

“The RBI will likely come out with a calendar for bond purchases under the open market operation program and, at this stage, there will be indirect moentisation,” said Ananth Narayan, associate professor at SP Jain Institute of Management and Research. “If there had been no RBI intervention so far, the yield curve would have been extremely steeper and with this news it would have been steeper, which would be awful in terms of financial stability,” Narayan added.

Does This Set The Stage For Fiscal Stimulus?

The increased borrowing may give the government some flexibility on increasing expenditure side and could give it room to announce more fiscal support measures.

Devendra Pant, chief economist at India Ratings and Research said that increased borrowing will help the government finance its fiscal deficit and undertake some amount of fiscal stimulus to support economic activity and support vulnerable sections of the society. Nayar, too, said that this would mean less pressure on the government to curtail expenditure to match the slower inflow of revenue.

Narayan, however, said this increased borrowing would mostly cover the shortfall in tax revenue.

“The brutal reality is that this increase in borrowing will barely cover for the loss of tax revenues which will come this year. Given the fact that tax collections will be much lower than what was budgeted, given that disinvestments are going to be a problem and given the fact that GDP is not going to be anywhere near the 10 percent that was budgeted, I think actual fiscal deficit could well cross 8 percent of GDP with just 1 percent of net additional spending,” Narayan said.

“Across centre and states, I see the fiscal deficit will go up beyond 14 percent,” he added.

WATCH | Experts Weigh In On Government’s Revised Borrowing Plan For FY21

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