Governments borrowing more than what they promise in their budgets is an old story in India. Supplementary demands for grants and borrowing calendars going askew are something that markets take in their stride. So when the bond market reacted adversely to the Union government’s surprise announcement on Thursday that it planned to borrow Rs53,000 crore more this year—roughly 0.6% of the gross domestic product (GDP)—it was something “normal”. Not normal are the contradictions in macroeconomic management that have been visible for a while now.
Finance minister Pranab Mukherjee had made clear in his budget that the government intended to contain the fiscal deficit at 4.6% of GDP, a figure which even at that time this paper had held to be rather unrealistic. At the time, there were two sources of disbelief. One was that fiscal consolidation on such a scale had never been attempted in recent years. A more potent roadblock in the road to fiscal normalcy was the continuing northward march of international oil prices.
These concerns have not been eliminated. While Thursday’s enhanced borrowing may not (or may) derail the fiscal deficit target, it shows the contradictions inherent in managing somewhat divergent goals—high growth and tempered inflation. These are clearly visible.
By Shyamal Banerjee/Mint
One source of financing the deficit is the small savings scheme. The government had expected the corpus to be around Rs35,000 crore. Instead, there has been an outflow. This is due to the fact that interest on small savings hovers around 8%, while bank deposits—after successive rounds of interest rate increases—are more attractive now. It need not be reiterated that the Reserve Bank of India had to undertake this painful therapy as the wave of government spending and entitlement programmes unleashed inflationary pressures. In effect, attempts at reining in one problem—of government creation—have led to another.
While one can quibble whether this is a mere change in the source or if it amounts to additional borrowing, the fact is it has delivered one more shock to markets that are already jittery.
It is a moot point if the fiscal deficit can be contained at 4.6% of GDP. Sure, it can be: by letting oil marketing companies bleed, either by making them share a greater portion of the government burden or by issuing them nearly worthless paper. The extent of the deficit will only be known later, but clearly the government’s credibility in sticking to its borrowing programme has been dented badly. There will be few who will now believe that it will not come back to borrow more.
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