Govt cuts borrowing need for FY18 to ₹20,000 cr

Move to lower additional borrowing requirement cheers markets

NEW DELHI / MUMBAI: Moving to limit the fiscal slippage in 2017-18 ahead of the February 1 budget presentation, the finance ministry on Wednesday pared its additional borrowing requirement before March 31 to ₹20,000 crore from ₹50,000 crore.

Bond prices rose, stock indices surged to lifetime highs and the rupee gained as the markets cheered the announcement.

“Government has reassessed additional borrowing requirements taking note of revenue receipts and expenditure pattern. Requirement of additional borrowing being reduced from ₹50,000 crore as notified earlier to ₹20,000 crore,” economic affairs secretary Subhash Chandra Garg wrote in a Twitter post.

The risk of the government breaching its fiscal deficit target of 3.2% of gross domestic product (GDP) in the fiscal year ending March increased significantly after it exceeded its ₹5.5 lakh crore full-year borrowing target by November-end because of lower-than-expected revenue collections and higher expenditure.

Government revenues have been under pressure due to a shortfall in indirect tax collections under the goods and services tax (GST) regime, prompting it to announce additional borrowing of ₹50,000 crore in December to fund spending in key sectors of the economy.

Suspected tax evasion and a cut in tax rates on many items have seen GST collections fall progressively since the tax was implemented on July 1. In December, GST revenue (for the month of November) came in at ₹80,808 crore, falling from ₹94,063 crore collected in August.

Data released by the finance ministry on Wednesday showed that direct tax collections grew by 18.7% this fiscal year up to January 15, representing 70.3% of the full-year budget estimate, providing a breather to the government.

“Government did not accept borrowings of ₹15,000 crore in last three auctions. Remaining ₹15,000 crore would be reduced from the notified borrowing programme of ensuing weeks,” the finance ministry said in a statement.

In the budget, the government had pegged its aggregate gross market borrowing at ₹5.85 lakh crore. With Wednesday’s revision, the number now stands at ₹6 lakh crore.

The reduction in borrowing will result in lower supply of securities and provide some relief to the bond market, where yields had risen because of worries over fiscal slippage.

The yield on 10-year bonds fell 16.6 basis points, its steepest fall since November 15, 2016, to close at 7.222% compared to its previous day close of 7.269%. Bond yields and prices move in opposite directions.

“The government has finally settled on the additional borrowing number that was originally expected in December by the market, and hence the sense of relief. Now that this confusion is behind us, I think bond yields will remain steady till the budget,” said Ananth Narayan, who teaches at SPJIMR, Mumbai.

On December 15, the Reserve Bank of India deputy governor Viral Acharya said banks must manage interest rate risks on their own and not rely on regulatory forbearance. This added to the woes of bond market participants, especially banks which had hoped for some regulatory leeway to contain losses in their bond portfolios.