Govt to borrow ~50k cr more via govt securities

Move may impact fiscal deficit target of 3.2% of GDP

The Centre looks set to breach the fiscal deficit target this year, with lower-than-expected revenue prompting it to go for additional borrowing of ~50,000 crore from the market. The borrowing is over and above the budget estimate of ~5.80 lakh crore for 2017-18, which would lead to the government missing its fiscal deficit target of 3.2 per cent of the gross domestic product (GDP) for the first time in four years.

At the same time, the government lowered its borrowing through short-term treasury bills by ~61,203 crore. This has made the task of exactly calculating the fiscal deficit a bit tedious exercise.

The government said in a statement it would not raise any net additional borrowing, as the increase in market borrowing will be offset by the decline in treasury bills. Nonetheless, market borrowings, both gross and net, are set to rise by ~50,000 crore.

Treasury bills, repaid within a year, are used for funding temporary mismatch of funds of the Centre and thus do not reflect fiscal deficit. However, if these are carried to the next year, these may mirror the fiscal deficit.

The additional market borrowing could take the fiscal deficit to 3.54 per cent of the GDP this year, the same as in 2016-17, against the Budget target of reining it in at 3.2 per cent. If short-term treasury bills are extended beyond a year, it could further widen the deficit.

“I am very happy that the government will take the fiscal deficit up to 3.5 per cent,” said Saumya Kanti Ghosh, chief economic adviser, State Bank of India.

There are also expectations that the deficit may be projected to be higher than 3 per cent of GDP in the Budget for 2018-19. The fiscal consolidation road map mandates the government to control the deficit at 3 per cent of GDP next year. Though the NK Singh panel has allowed escape route, the government has not so far accepted the report.

Ghosh said, “The next year also it could be closer to 3.5 per cent. This will be positive for the economy as the next year’s fiscal deficit will come on the back of higherthan-expected GDP. In what will be a crucial budget before the general elections, the room to spend more will be much needed.”

However, if the government does not borrow the whole amount of market borrowings, that would mean that the fiscal deficit might be a bit lower than 3.5 per cent this financial year.

“It appears that the fiscal deficit could go up to 3.5 per cent. But as has happened in the past, the Centre may not borrow the whole amount,” said Madan Sabnavis, chief economist at CARE Ratings.

He added that by announcing the additional borrowing, the Centre was preparing the markets for a fiscal slippage being announced in the Budget.

Aditi Nayar of ICRA said while the upward revision in the dated securities was being offset by the reduction in the planned treasury bills issuance, concerns regarding a mild fiscal slippage persisted on account of the sequential dip in GST collections for November 2017. She said a mild fiscal slippage may already be priced in by the market.

The Centre is staring at a tax revenue shortfall of ~40,000-50,000 crore. A ~25,000-30,000 crore shortfall is expected in indirect tax revenue due to the goods and services tax (GST), while receipts from non-tax revenues, including spectrum, transfer by the Reserve Bank of India (RBI), dividends from public sector enterprises, state-owned banks and direct taxes could lead to a gap of ~20,000 crore between actual receipts and what was projected, even if expected higher proceeds from disinvestment are taken into account.

For instance, the RBI has this year paid the Centre a surplus of ~30,600 crore. The Centre says it was expecting around ~43,000 crore. There is no certainty that the RBI will pay the extra amount. There is also concern that PSUs, having been told to spend more in capital expenditure, as well as to buy back shares, may not be able to pay the dividend expected of them.

“We could be looking at shortfalls in GST collections, dividends from public sector enterprises and state owned banks, and in direct tax revenue as well,” an official said.

The fiscal glide path had to be extended on account of lower-than-expected revenue from the GST, another official said.

The RBI re-adjusted the last-five auction calendar to ~15,000 crore each, from ~5,000 crore scheduled earlier, to accommodate ~50,000 crore of extra government borrowing in the fiscal year. This comes a month after Moody’s revised up India’s sovereign ratings after a gap of 14 years to Baa2 on the back of policy measures, including efforts towards fiscal consolidation.

Both Moody’s and Standard & Poor’s have warned that fiscal consolidation still remains a challenge for the Centre and the states.

Economic Affairs Secretary Subhash Garg had said in September that the Centre would reassess its borrowing and fiscal targets in December. As of end- October, the fiscal deficit had reached 96.1 per cent of the full-year target. For April-September, the fiscal deficit was 6.3 per cent of the GDP. The finance ministry has reined in spending over the past few months and will continue to do so after front-loading expenditure in the first half of the year due to advancement of the budget.