The government decided on Tuesday to borrow Rs 46,000 crore (Rs 460 billion) more from the market than it had announced earlier, in order to bridge the huge gap in finances due to lower revenue collections and extra spending to boost sagging demand in the economy.
This would take Centre's borrowing in the current fiscal to Rs 2,51,000 crore (Rs 2,510 billion), nearly double the budgeted amount in February 2008.
Economists say the additional borrowing is unlikely to affect the yield (the ratio of price and return on bonds) in the near future because there is ample liquidity and commercial banks are keen to park their money in government securities because of the prevailing atmosphere of risk aversion.
However, experts warned that if the fiscal deficit continued to remain high at the time of economic recovery, higher borrowing would most likely 'crowd out' private investment. This, they said, might increase the cost of borrowing.
Economists and government officials predict that Asia's third-largest economy will recover in the third quarter of the next fiscal or in 2010-11 fiscal .
"We had discussions with the Reserve Bank of India. The borrowing will be between February 20 and March 20 to the order of Rs 46,000 crore (Rs 460 billion)," said economic affairs secretary Ashok Chawla. He said the extra borrowing would be in four tranches.
RBI deputy governor Shyamala Gopinath said that the central bank would carry out the programme in a non-disruptive manner.
The Prime Minister's Economic Advisory Council had earlier projected a combined deficit (of Centre and states) in excess of 10 per cent of gross domestic product. It had estimated that the additional expenditure would add 4.4 per cent of GDP to the fiscal deficit, while lower tax collections would add 1 per cent of GDP to the fiscal deficit.
Centre to spend more next year too:
With slowing of the economy expected to continue in the next financial year also, economists said the government might borrow at these high levels next year too in order to boost demand.
"The government may resort to more borrowing if it wants to maintain the same level of expenditure the next year also," said M Govinda Rao, director, National Institute of Public Finance and Policy, and a member of the PM's council.
However, lower oil prices were expected to reduce the fiscal deficit in the next financial year by 1.6 per cent of GDP, he said, adding that the fiscal discipline should be restored once the economic conditions improved.
Despite pressure on government finances, low inflation rate might keep bond yields low, said D K Joshi, economist with ratings and advisory firm Crisil.