As govt borrowing balloons, focus turns to bond market

The continued rise in interest is a pressure on fiscal, but it is not an easy way out unless the government cuts back on populist measures and sticks to fiscal prudence as laid out in the FRBM, which the government missed for the second consecutive year.

Illustration: Uttam Ghosh/Rediff.com

The bond market is bracing for unrelenting supply of government debt papers in the next fiscal as the Centre plans to borrow an astronomically high Rs 7.1 trillion on a gross basis, even as fiscal deficit as a percentage of gross domestic products (GDP) remains the same between the current fiscal and the next.

Including provisioning for buyback of Rs 50,000 crore, however, the market borrowing pushes up even further to Rs 7.6 trillion, which is much higher than the market had estimated.

The steep hike in gross borrowing is not because the government’s fiscal deficit has suddenly widened on account of productive use of resources, or dearth of revenue mobilisation, but a major chunk of the borrowing would go to service existing debt, including market bonds, recapitalisation bonds and small savings certificates, the Budget documents show.

“The overall budget size to the GDP is pegged at 13.25 per cent, with interest payments alone accounting for 3.1 per cent of the GDP and subsidies another 1.4 per cent of the GDP,” noted Gaurav Kapur, chief economist of IndusInd Bank.

The gross borrowings number also looks optically high because redemptions this year are also close to a trillion rupees higher than last year.

Redemption of old bonds is good news for the market, as bonds mature and the investors get money (which they can utilise to purchase fresh bonds), but the gross numbers also hold importance as the government’s bunched up payments get pushed up and interest component balloons.

The fiscal deficit for both this year and the next is pegged at 3.4 per cent of the GDP.

At the same level of deficit, the government in this fiscal has actually borrowed Rs 5.71 trillion, less than it originally planned Rs 6.05 trillion.

The yield on the most-traded 9-year bond rose 13 basis points after the Budget.

In an expanding economy, it is normal for the deficit to widen in absolute terms even when the percentage in respect to the GDP remains constant.

Higher borrowing numbers partly reflect that, economists explain.

The rise in yields is because despite higher borrowing, the market is suspicious about the government’s ability to achieve as much in revenue as it envisaged in the interim Budget.

The higher numbers also act as a dampener to sentiment, despite high redemptions, as new longer dated papers increase the average maturity profile of dated paper investment, explained Ramkamal Samanta, vice-president, investments, Star Union Dai-Ichi Life Insurance.

“Even if you set aside the projections for the next year, what the government plans to achieve in the remainder of this financial year also seems a little optimistic,” said a senior economist, requesting anonymity.

According to the economist, in the full Budget in June, it is quite possible that the fiscal deficit numbers for both years would be revised.

That would mean more borrowings from the market, or, if the projections have to be protected, a steep cut in expenditures, particularly in the infrastructure space.

Receipts Budget showed that the net borrowing is pegged at Rs 4.73 trillion against Rs 4.22 trillion in the current fiscal year.

That’s an increase of about Rs 50,000 crore in fresh borrowing.

The redemption next fiscal year will be around Rs 2.37 trillion against Rs 1.48 trillion in the 2018-19 fiscal year.

The bump in borrowing, according to economists, is not because of productive use of resources.

The government, in reality, has reduced expenditures in key heads by 20-30 per cent each. But it is because of higher interest outgo.

For example, interest on recapitalisation bonds has steeply increased to Rs 16,193.9 crore, from Rs 5,800.55 in the current fiscal, which is a rise of Rs 10,393.35 crore.

Interest on market loans - essentially government securities - rose steeply by Rs 46,905.85 crore between FY 18-19 and FY 19-20, compared with a rise of Rs 29,725.86 crore a year ago.

Total interest on internal debt will rise by Rs 63,191.92 crore between FY19 and FY20, compared with Rs 41,768.80 crore between FY18 and FY19.

Interest on small savings certificates rises by Rs 7835.79 crore to Rs 55,152.44 in fiscal 2019-20.

The continued rise in interest is a pressure on fiscal, but it is not an easy way out unless the government cuts back on populist measures and sticks to fiscal prudence as laid out in the FRBM, which the government missed for the second consecutive year.