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Business News/ Companies / News/  How govt plans to meet its fiscal deficit target
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How govt plans to meet its fiscal deficit target

The finance ministry on Friday announced it would borrow 70,000 crore less from the market in FY19 than the budgeted 6.05 trillion, with borrowing in the second half of the fiscal pegged at 2.47 trillion. Mint takes a look at the reasons and repercussions.

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Why did the centre reduce borrowing?

The equity and bond markets have been jittery for some time given the rupee’s depreciation and rising oil prices. Investors have been worried about the centre’s ability and willingness to curb expenditure in a pre-election year and meet its fiscal deficit target of 3.3% of GDP this fiscal. By announcing that it will borrow less from the debt market, the centre is signalling that its finances are under control and that it is committed to meet its fiscal deficit target. Higher borrowing from the debt market would mean competing with private firms for the same fund, which could increase the interest rate.

How will the centre adjust for this reduced market borrowing?

The centre had kept interest rates on small savings schemes unchanged for two consecutive quarters. Last month, it increased interest rates on these schemes by 30-40 basis points for the October-December quarter. This is expected to bring in more funds from investors. As the custodian of the National Small Savings Fund, the government aims to use this fund to partly finance its fiscal deficit. According to the National Savings Institute, under the ministry of finance, a net investment of about 50,300 crore was made in small savings schemes in 2016-17.

Why does the centre borrow from the market?

The government’s revenues do not suffice to fund all its projects. Hence, it develops a funding gap that is financed through borrowings from the market and other sources.

How will the bond market react to the government’s decision?

The government’s move is expected to ease pressure on liquidity and bond yields that have crossed 8%. Aditi Nayar, principal economist at Icra Ltd, said that with uncertainty regarding the size of the market borrowings for the second half of this fiscal out of the way, bond yields would be guided by the outlook for inflation risks such as crude oil prices and the rupee, the pipeline of open-market operations, as well as emerging information on the balance of various fiscal risks.

Has the government’s revenue situation been comfortable so far?

While direct tax collections remain comfortable, last week finance secretary Hasmukh Adhia said that collections of goods and services tax (GST) may not meet the target of 1 trillion in revenue every month. So far, the average monthly collection has been 96,705 crore—a 16,473 crore shortfall till August. It will also be tough to meet the disinvestment target of 80,000 crore after the centre cancelled immediate plans of selling the national carrier Air India.

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Published: 01 Oct 2018, 10:59 AM IST
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