Govt market borrowing target for FY24 in Budget may push 10-year bond yields to 7.75%
4 min read 12 Jan 2023, 03:40 PM ISTPrasanna expects the RBI to raise interest rates next month and did not rule out further increases
PremiumIn the upcoming Budget 2024, experts believe the government may focus on sustaining domestic growth while continuing its commitment towards fiscal consolidation and at the same time limiting the surge in market borrowings. That being said, India is factored to peg market borrowings at a record high for fiscal FY24 in this Budget. If that is the case, then bond yields are likely to go up.
In its note dated Thursday, ICRA estimates gross market borrowings of government and general government to be at ₹14.8 trillion and ₹24.4 trillion for the fiscal FY24 which will begin from April 1, 2023, and will continue till March 31, 2024. This would be higher than the market borrowing target of ₹14.1 trillion and ₹22.1 trillion in FY23.
Aditi Nayar, Chief Economist and Head – Research and Outreach, at ICRA said, "With a global growth slowdown looming large, the FY2024 Union Budget needs to focus on sustaining the domestic growth momentum, while at the same time demonstrating a continued commitment towards fiscal consolidation in addition to limiting the rise in the market borrowings."
Meanwhile, ICRA anticipates a fiscal deficit target of 5.8% of the GDP for FY24 -- which would be a healthy moderation from the target of 6.4% of GDP set for FY23.
As per ICRA's assessment, Nayar said, the FY24 Union Budget can appreciably enhance the GoI’s capital expenditure to ₹8.5-9.0 trillion and target a lower fiscal deficit of 5.8% of GDP, aided by the welcome cushion offered by lower subsidies. Despite this, higher redemptions will enlarge its gross dated market borrowings to ₹14.8 trillion in FY2024 from ₹14.1 trillion in FY2023.
On the other hand, ICICI Bank's treasury head B Prasanna told Reuters that the government borrowing will likely hit a record high next fiscal year, as it prioritises growth, which could push bond yields higher. Prasanna expects government borrowing of ₹15.75 trillion in FY24 -- targeting a 5.9% fiscal deficit of GDP.
Further, Prasanna told the news agency that the bond yield may cross 7.50% only if the government comes up with a substantially high borrowing number or if the timetable and the choice of papers for the auctions are not well calibrated as per market expectations.
Nayar also believes that the government's market borrowing target for FY24 may push bond yields higher, but it expects the 10-year Gsec to rise as high as 7.75%.
"With a larger redemption of G-sec and SGS, gross borrowings are estimated to enlarge to ₹24.4 trillion in FY2024 from the projected ₹22.1 trillion in FY2023. This is likely to push up the 10-year G-sec yield to 7.4-7.75% after the presentation of the Union Budget, Nayar added.
Furthermore, ICRA expects the government's net tax receipts to overshoot the budgeted amount by a healthy Rs. 2.1 trillion in FY2023 aided by robust direct tax collections. Further, this combined with expenditure savings to the tune of ₹1.0 trillion along the lines seen over the last 5-6 years on an average, are expected to partly offset the sizeable net cash outgo announced in the First Supplementary Demand for Grants and the shortfall in non-tax revenues and disinvestment receipts.
Consequently, the Moody's-backed credit rating agency expects the government's fiscal deficit to come to around ₹17.5 trillion in FY23 --- exceeding the budgeted amount of ₹16.6 trillion. However, a larger-than-estimated GDP would allow the fiscal deficit to remain at the budgeted target of 6.4% of GDP.
Furthermore, ICRA expects gross tax revenue at ₹34 trillion in FY24 up by 9.4% from the projected level for FY23 --- with growth in direct taxes likely to outpace that in indirect taxes.
ICRA also factors a double-digit growth in capital expenditure to ₹8.5-9.0 trillion in FY2024, relative to the level of Rs. 7.5 trillion, expected in FY2023. In contrast, revenue spending is expected to rise by a relatively muted 3%, dampened by a lower outgo on account of the food and fertiliser subsidy.
However, ICRA expects the Indian government's revenue deficit to recede to ₹9.5 trillion in FY24 and 10.5 trillion in FY2023, the fiscal deficit would dip only mildly to ₹17.3 trillion from ₹17.5 trillion, respectively, led by higher CAPEX. Nevertheless, as a proportion of GDP, the fiscal deficit is expected to ease to 5.8% from 6.4%, respectively.
Nayar added the quality of spending and of the fiscal deficit is expected to improve in FY2024 vis-à-vis FY2023, following the relatively faster growth foreseen in the GoI’s CAPEX. However, the share of interest payments in total expenditure will remain elevated at ~24-25%, owing to the sizeable increase in the GoI’s debt outstanding in the post-Covid period, underscoring the need to limit borrowings, going ahead.
Finance Minister Nirmala Sitharaman will announce the country's Budget for 2023-24 on February 1, 2023.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
