Govt borrowing: Set to increase in FY 2011-12

Government Borrowings to remain high during 2011-12 in the absence of one-off revenues, higher subsidy payments and social sector spending

The market borrowing of the government is the major source of deficit financing in India. The Government of India provided the fiscal stimulus in terms of increased expenditure and cut in tax rates during 2008-09 to help the domestic economy to counter the impact of global economic crisis, which caused the fiscal deficit to jump up to seven year high of 6.0% of GDP.

The net market borrowing requirement of the government also surged to Rs 233630 crore during 2008-09, to finance the increased fiscal deficit, from Rs 131768 crore during 2007-08. The government continued to implement fiscal stimulus during 2009-10, further pushing up the fiscal deficit to 11 year high of 6.3% of GDP during 2009-10.

Meanwhile, the net market borrowing also surged to Rs 398411 crore during 2009-10.

The monetary and fiscal stimulus along with slight global recovery helped the domestic economic growth to rebound to 8.0% during 2009-10 from 6.8% growth recorded in 2008-09. Looking at the better prospectus for economic growth, the Government decided to partially withdraw fiscal stimulus in the Union Budget for 2010-11.

The economic growth was also expected to further accelerate during 2010-11. Accordingly, the indirect tax rates were raised, while additional revenue was expected from 3G and BWA license fees and disinvestment of equity in public sector enterprises.

This helped the government to reduce the budgeted fiscal deficit to 5.5% of GDP% for 2010-11. The Central Statistics Office (CSO) has also forecasted the GDP growth to accelerate to 8.6% during 2010-11. The lower fiscal deficit helped to government to cut its net market borrowing to Rs 345010 crore during 2010-11.

Government borrowing during 2009-10 and 2010-11

The gross market borrowing of the central government stood at Rs 451000 crore during 2009-10. However, the borrowing program was supported with MSS securities unwinding worth Rs 42000 crore (Rs 33000 crore of dated securities and Rs 9000 crore of Treasury Bills) in the first half of 2009-10. Reserve Bank of India had also announced the Open Market Operation (OMO) purchase of dated securities for the notified amount of Rs 80000 crore during the first half of 2009-10, while it ended up buying Rs 57486.83 crore worth of dated securities under OMO.

Meanwhile, RBI has also de-sequestered Rs 33000 crore worth of MSS bonds leading to transfer of cash from MSS account of the government to normal cash account that forms the part of government market borrowing. Thus, the net supplies of fresh papers during 2009-10 stood at Rs 265924.2 crore approximately during 2009-10.

The Union Budget 2010-11 placed the gross market borrowing for the fiscal year at Rs 457000 crore. However, there were redemptions worth Rs 112133 crore scheduled for the current fiscal, but there was no unwinding of MSS bonds. However, the liquidity conditions were extremely tight since May 2010, which forced the RBI to conduct OMO auction to purchase securities and infuse liquidity into system.

The RBI purchased the dated securities worth Rs 67246.28 crore under OMO, while the fresh supplies of papers was also reduced by Rs 20000 crore. Thus the net supplies of fresh papers stood at Rs 257763.7 crore for 2010-11.

Despite, the lower net supplies of fresh papers the bid-to-cover ratio was substantially lower at 2.27% during 2010-11 compared to 3.67% for 2009-10 with higher net supplies, which can be largely attributed to tight liquidity conditions during 2010-11.

State Governments market borrowing

The Ministry of Finance has been fixing the annual borrowing ceilings for States largely. The fiscal deficit target for states was relaxed for 2009-10 from 3.0% to 3.5% of state's respective gross state domestic products (GSDP), in response to the economic slowdown. Subsequently, it was decided to extend the relaxation in the fiscal deficit target of the States to 2009-10 in order to spur the development of infrastructure and employment generation through larger public investment.

During 2009-10, states were allowed to borrow up to 4% of their GSDP to reverse the impact of economic slowdown and accelerate the growth revival in the medium term. As per the government estimates, this dispensation was expected to allow the States to borrow about Rs 21000 crore additionally in 2009-10.

About 28 states borrowed Rs 130622 crore during 2009-10 through issue of 10-year State Development Loans (SDLs). The state of West Bengal raised the largest amount of Rs 16552 crore, followed by Maharashtra and Andhra Pradesh borrowing Rs 15500 crore and Rs 14383.14 crore, respectively. Further, Tamil Nadu and Uttar Pradesh raised Rs 12598.96 crore and Rs 12376.93 crore, respectively during 2009-10.

During 2010-11, about 24 states have raised Rs 94272.96 crore through issuance of 10-year State Development Loans (SDLs) up to 22 February 2010.

The state of Uttar Pradesh has raised the largest amount of Rs 12000 crore followed by Andhra Pradesh and Maharashtra raising Rs 11450 crore and 10346 crore, respectively.

Fiscal outcomes for current fiscal expected to be better than Budget Estimates

In 2010-2011, with the recent upward revision of GDP estimates, the estimated revenue, fiscal and primary deficits as a ratio of GDP are marginally lower. Thus, the budget estimate of Central government's fiscal deficit relative to GDP is estimated at 5.2% and the consolidated fiscal deficit of Central and State governments is estimated at 8%.

Similarly, the revenue deficit-GDP ratio of the centre for 2010-11 is budgeted at 3.8%. Meanwhile, the larger than expected revenue from 3G and BWA licenses fees would further support the fiscal indicators for 2010-11.

As per the Medium Term Fiscal Policy Statement, the government has planned to cut the fiscal deficit to 4.8% for 2011-12 and further down to 4.1% in 2012-13. This is in line with the recommendations of the 13th Finance Commission.

The 13th Finance Commission has also mandated that fiscal deficits of the states should come down gradually to 2.4% of GDP i.e. 3% of GSDP by the end of 2013-14.

But if the government fails to increase excise duties from current levels, and in the absence of one time inflows like 3G auctions, and the need to step up social spending, For FY12, we expect the fiscal deficit to remain at 5.0% of GDP.

But if the government announces amnesty schemes, and is effectively implemented and / or if excise duties are revised upwards, then there is a possibility of fiscal deficit brought down to 4.8% for FY 2011-12, in line with FRBM targets.

The burgeoning subsidies due to rising food prices and no diesel price along with absence of any major one-off revenue source will restrict the government effort to cut fiscal deficit. Meanwhile, the government has to incur huge spending on social sector schemes such as MNREGA.

Outlook

The Prime Ministers Economic Advisory Council (PMEAC) has projected the India's GDP at current market prices at Rs 89.9 lakh crore for 2011-12. Thus, assuming the 5% fiscal deficit for 2011-12, the fiscal deficit in value terms could be around Rs 4.55 lakh crore.

So, in the absence of any major one-off revenues, if the government finances 90% of the fiscal deficit with market borrowing the net market borrowing could be around Rs 4 lakh crore.

However, there are redemptions worth Rs 73581 crore scheduled for 2011-12. Thus, the gross market borrowing would be around Rs 4.7 lakh crore during 2011-12 compared to 4.47 lakh crore for 2010-11.

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