Govt announces record borrowing plan
NEW DELHI: The government is planning to borrow ₹14.95 lakh crore in the next financial year, according to the Union Budget presented by finance minister Nirmala Sitharaman on Tuesday, a record amount that is aimed largely at financing a massive capital expenditure plan.
On a net basis (less repayments), this borrowing will include ₹11.6 lakh crore from the market to bridge the predicted deficit in its ₹39.45 lakh crore annual budget.
The record borrowing tracks a 4.6% rise in proposed government spending in the next financial year, compared to the current period.
“This budget continues to provide impetus for growth,” Sitharaman said in Parliament during her Budget speech.
For the next financial year, the government is targeting a fiscal deficit of 6.4%. In the current financial year, the deficit came to 6.9%, slightly more than the 6.8% targeted for the period, Sitharaman said.
Analysts said the fiscal deficit target for next year was higher than expected. A Bloomberg survey of economists had predicted a fiscal deficit target of 6.1%.
In her speech, Sitharaman explained the decision, saying: “While setting the fiscal deficit level in 2022-23, I am conscious of the need to nurture growth, through public investment, to become stronger and sustainable”.
Among the key areas where the government will spend are capital infrastructure such as roads, railways, airports, ports,
public transport, waterways and logistics, the transition to green energy, digitalisation, public health, and social infrastructure.
The decision on raising the borrowings appeared to roil bond markets.
The benchmark 10-year bond yield rose 15 basis points (bps), posting its biggest single-day rise since May 11, 2020, according to Reuters. So far this year, the benchmark has already risen 38 bps on top of the 56 bps in 2021, the news agency said, adding that at one point on Tuesday, the surge went as high as 22bps before it relented.
“The sharp rise in bond yields post the budget announcement is testament to the surprise for bond markets, which now will need to absorb this large borrowing,” said Aurodeep Nandi, India economist and Vice President at Nomura, Reuters reported.
A second analyst said the plan could be challenging in the event the central bank takes policy measures to curb liquidity.
“The borrowing numbers are higher than even the highest estimate among market participants. It’s not been offset with any announcement regarding overseas trading of Indian bonds or bond index inclusion,” said A Prasanna, head , fixed income research, at ICICI Primary Dealership. “This borrowing program will be very challenging for market in a year when RBI is expected to raise rates and curtail excess liquidity.”
There was some expectation earlier that the government could facilitate the inclusion of Indian bonds in global bond indices by agreeing to a change in the way it taxes gains on these for foreign investors. Citigroup
Inc. on Monday recommended buying Indian sovereign bonds, saying the budget session was likely to see law changes enabling inclusion of India’s bonds in emerging market bond indexes.
An economist also said that the government’s borrowing plan also risks crowding out private investment. “This progrowth budget poses upside risk to our near-term GDP growth projections. But it also risks crowding out private investment by spurring bond yields higher,” Bloomberg quoted economist Abhishek Gupta as saying.
Crowding out is often the outcome of when a government massively hikes its borrowing plans, which could in a distant effect lead to an increase in real interest rates, which in effect can scuttle capital investment by corporations that could see a possible rise in borrowing costs.
The Reserve Bank of India has resisted raising interest rates recently despite the threat of high inflation.
How long it continues to do so at a time when central banks around the world are tightening money supply remains to be seen.