Centre cuts reliance on market borrowings to finance fiscal deficit

Illustration by Ajay Mohanty
Market borrowings, which have traditionally been the largest source to finance the Central Government's fiscal deficit, have had their share eroding the past four years.

The share of market borrowings to bridge the fiscal deficit has plunged from 89 per cent in FY15 to 71 per cent in FY19. In FY18 and FY19, the government missed its budgeted fiscal deficit target. However, government efforts to curtail fiscal deficit have helped lower it from 4.1 per cent of the GDP in FY15 to 3.4 per cent during FY19.

Instruments such as small savings, provident funds, external assistance and short-term borrowings are also employed to squeeze the deficit.

Fiscal deficit of the Central Government is predominantly financed by market borrowings (70 per cent) followed by small savings (20 per cent). Rest of the avenues contribute 10 per cent in plugging the deficit, a report by CARE Ratings said, quoting data from the Union budget.

While the share of market borrowings has declined from 89 per cent to 71 per cent, that of small savings has risen drastically from six per cent to 20 per cent from FY15 to FY19 in meeting the deficit. 

For FY20, the government has budgeted its market borrowings at Rs 7.1 trillion, the highest in six years and 24.3 per cent higher than FY19. It may be noted that market borrowings by the Centre in last financial year was the lowest since FY14.

Net borrowings of the central government have been in the range of Rs 4.1-4.5 trillion during FY15-FY19.

“The average cost of borrowings during the first three months of  FY20  (April-June)  is  7.21 per cent. Rate  cut  of  50  basis points  by  the RBI during FY20 has led to moderation in the Gsec (government securities) yields. Although  the  cost  of  borrowings  has been  declining, the interest costs in absolute terms have increased from Rs four trillion to Rs 5.9 trillion during FY15-FY19, denoting a CAGR (compounded annual growth rate). The interest cost is further expected to increase by 13 per cent to Rs 6.7 trillion as per the  FY20 budgeted numbers. This could be attributed  to  higher  amount  of  borrowings  budgeted  during 
the year”, CARE Ratings noted.

CARE Ratings  expects  the  government  to  maintain  its  fiscal  deficit  target  at  3.4 per cent  of  the  GDP. There  could  be  a deviation, however, it would only be marginal (0.1 per cent of the GDP). But any further increase in market borrowings will have a bearing on the interest rates and bond markets if coupled with higher credit growth. The RBI will have to undertake OMO (open market operations) purchases to ease the liquidity conditions in the banking system, in case  the credit growth outpaces the growth in deposits in the next few months, it suggested.