People exercise outside the North Block of Central Secretariat building that houses the Ministry of Finance. (Photographer: Prashanth Vishwanathan/Bloomberg)

Government Projects 33% Increase In Gross Borrowings By FY21

The government’s gross borrowing is expected to rise over a third to Rs 7.14 lakh crore by 2020-21.

Gross borrowing is expected to touch the Rs 6.74 lakh-crore mark the next fiscal from Rs 5.35 lakh crore at present, according to a status paper on government debt that was released by the Ministry of Finance yesterday.

The projections assume India’s gross fiscal deficit will decline to 3 percent by 2020-21, in line with estimates made in the medium-term fiscal policy statement. Nominal GDP is expected to grow by 11.6 percent in 2018-19.

Net market borrowing as a proportion of GDP is expected to decline from 2.34 percent in 2017-18 to 1.99 percent in 2020-21.

The demand for securities in the 10-14 years maturity bucket is high due to greater proportion of borrowing in the category even as its share in total issuances of dated securities during the current financial year has declined over previous years.

The shares of short-term securities of less than five years, and 5-9 years, and those of medium-term (10-14 years) have been adjusted for elongation of maturity. “Depending upon the evolving market conditions and Government of India’s requirements, the strategy of elongation of maturity would be furthered,” the status paper said.

The paper outlines an alternate scenario when adverse economic conditions could lead to slippage in forecast in the medium-term fiscal policy statement.

Under the alternate scenario:

  • Nominal GDP would grow at 11 percent, 11.2 percent and 11.5 percent during 2018-19, 2019-20 and 2020-21, respectively.
  • Gross fiscal deficit for 2018-19, 2019-20 and 2020-21 have been assumed at 3.5 per cent, 3.8 percent and 4.0 percent, respectively.
  • This would increase India’s gross market borrowing to Rs 8.81 lakh crore in 2021.

Debt Management Strategy For 2018-21

India will maintain low risk and stable debt structure while financing its needs and strategise on low-cost borrowing and market development, the paper said.

Reduction in cost of debt is sought to be achieved over medium to long term by formulating an appropriate issuance strategy while developing the government securities market. Borrowing requirements for the year are estimated and distributed over different segments of maturity and the market appetite. “Proper demand estimation in different segments, planned issuances and offer of appropriate instruments would aid in lowering costs,” the report said.

To achieve the objectives of medium-term debt management strategy for 2018-19 to 2020-21, the report says these actions will be taken:

  • Carry forward transparent issuance process by providing predictable borrowing programme to investors.
  • Having continuous investor interaction with other stakeholders to keep their views and suggestions in view while finalising borrowing programme.
  • To build more benchmarks of commonly desired tenors like 7 years and 12 years by issuing sizeable volumes under them.
  • Elongate the maturity of the debt portfolio.
  • To issue a variety of instruments such as inflation-linked bonds and floating rate bonds to help investors manage their portfolio more efficiently.
  • To rationalise interest rates on small savings schemes and other instruments like provident fund and special securities in line with those prevailing in the economy.
  • Diversify the investor base and encourage retail and mid-segment investors’ participation in G-Sec market.

The status paper also shows ownership pattern of dated securities have gradually broadened the market. Commercial banks remain the dominant shareholders even as their stake declined from 61 percent at March 2001 to 42.7 percent at March 2018, which may partly be attributed to reduction in statutory liquidity ratio requirements.

These requirements for banks reduced from 25 percent of net demand and time liabilities to current requirement of 19.50 percent. Insurance companies and provident funds account for 23.5 percent and 5.9 percent respectively, of government securities creating stable demand for long-term securities.

Central government’s outstanding liabilities were Rs 77.9 lakh crore or 46.5 percent of GDP as on March 2018 compared with Rs 58.66 lakh crore, or 47.1 percent of GDP, in 2014-15.