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Budget 2019: Why Economists Are Watching Public Sector Borrowings Closely

When the government presents the final budget of its term on Friday, economists will not only be watching planned market borrowings by the central government but also those likely to be undertaken by central public sector enterprises.

Over the past five years, the burden of capital expenditure, which supports economic growth, has slowly been passed onto the balancesheets of states and public sector firms. This means that while the central government’s market borrowings alone may seem reasonable, total public sector borrowings have risen significantly.

Data from budget documents shows that CPSE borrowings have risen by almost three times over the last five years. The data, included in the ‘Internal and Extra Budgetary Resources’ part of the budget captures debt market borrowing, external commercial borrowings and suppliers credit.

According to a JPMorgan report dated Jan.30, public-sector borrowings by central and state governments, CPSEs and off-balance sheet borrowings, constituted around 8.2 percent of GDP in 2017-18, which is the same level as five years ago. This does not include borrowings by state-based PSEs like electricity distribution companies.

Undoubtedly, a lot of the borrowing – particularly by states and CPSEs – is to finance much-needed capex. But a public sector borrowing requirement of this quantum – sustained for several years – constitutes a large claim on domestic household financial savings, which have fallen in recent years from 22 percent of GDP to 16 percent of GDP. 
Sajjid Chinoy, Chief India Economist, JPMorgan

Chinoy added that if private investment is to be encouraged over the next five years, the public sector would need to reign-in its spending plans, or else “borrowing costs would rise sharply and crowd out some private activity”.

Capital expenditure trends, detailed in each budget, also present a telling picture.

Over the past three years, the gross budgetary support provided by the government has remained mostly static. In contrast the funds generated through ‘Internal and Extra Budgetary Resources’ have risen. It could be argued that this may keep the fiscal deficit artificially low, if one assumes that the government is substituting budgetary spend with borrowings on the balancesheet of public sector enterprises.

Budget 2019: Why Economists Are Watching Public Sector Borrowings Closely

Pranjul Bhandari, chief India economist at HSBC noted that the glut of public sector paper is exhausting markets. “The overall supply of government paper (central, state government, and PSU combined) has risen rapidly, increasing the ‘net supply’ in FY18,” Bhandari wrote in a report dated Jan.18.

Bhandari noted that this excess supply may not have pushed up yields in 2018 because the central bank was actively buying bonds through its open market operation (OMO) program. But if total borrowings from the public sector remain high, it could present a challenge in the coming financial year.

This raises questions for FY 20 when the central government will be grappling with an elevated repayment bill and the central bank may not necessarily do as many OMO bond purchases.
Pranjul Bhandari, Chief India Economist, HSBC