Mint Primer: Government borrowing: What it means for the economy

What’s the govt’s borrowing plan?

The central government will borrow ₹6.55 trillion during the second half of the ongoing fiscal year, which comprises 42.45% of its gross market borrowing of ₹15.43 trillion for the full year. The borrowing for FY24 will be done through dated securities. The borrowing in the second half of the year will be completed through 20 weekly auctions, spread over 3, 5, 7, 10, 14, 30, 40 and 50-year securities, with different shares. The Centre often front-loads its capital expenditure plans, which means borrowing more during the first half of the year, to maintain growth momentum.

How did the market react to this?

Breaching the borrowing plan would have impacted the markets and bond yields. Sticking to the borrowing plan demonstrates fiscal prudence. This has a calming effect and reduces pressure on the markets. This also indicates that there will be enough liquidity available in the markets, though at present there’s no shortfall of liquidity. The government’s 10-year bond yield was trading at 7.17% on Wednesday, up from 7.14% on Tuesday. According to some economists, while the government is unlikely to breach its borrowing outlook, its market borrowing could end up being lower than the budgeted amount.

What other options does the government have?

The Centre can dip into small savings funds, like the National Small Saving Fund (NSSF), Senior Citizen Saving Scheme, etc., which have seen a surge in net collections. These collections have grown over 48% in Q1FY24, compared to the year-ago period. The increase in the net collections of small savings can help the Centre reduce its dependence on the markets.

How will the fiscal deficit be impacted?

The Centre aims to stick to a fiscal deficit target of 5.9% of GDP on the back of robust tax and non-tax collections, as well as the expected higher dividends from the Reserve Bank of India and public sector banks (due to higher interest rates as compared to the last fiscal). Though the government is unlikely to reach its divestment target for FY24, which stands at ₹51,000 crore, it has no plans to curtail its capex programme as any shortfall from disinvestment proceeds will be made up from higher dividends.

Has government borrowing increased?

The Centre’s borrowing has increased from about ₹7 trillion in FY20 to about ₹15 trillion in the ongoing fiscal, as it shores up its capital expenditure to push for growth often in the absence of a boom in private capital. However, this hasn’t impacted government bond yields as these borrowings have been done in a structured way, showcasing fiscal prudence and discipline. During the last few years, the government hasn’t breached its borrowing targets, even during the pandemic, which has helped market sentiments.