The Finance Ministry is hoping to lower the Centre's annual gross borrowing through bonds to Rs 12-13 lakh crore over the next few years, government sources in the know of the matter said.
"We have to start thinking about going back to more normal figures of gross borrowings. It can't be that we go from Rs 15.43 lakh crore this year and Rs 16 lakh crore or more next year," one of the sources cited above told Moneycontrol.
"At the least, we should pause at Rs 15.43 lakh crore. Initial steps have been taken, considering the markets expected the Centre to borrow around Rs 16 lakh crore in 2023-24. But we are below that," the source added.
The Central Government’s borrowings from the market through the issuance of bonds shot up during the coronavirus pandemic as expenditure mounted and revenues dried up, resulting in a fiscal deficit of 9.2 percent of GDP in 2020-21. That year saw the gross borrowing of the government jump 77 percent from 2019-20 to Rs 12.6 lakh crore as the Centre announced stimulus packages to prevent the Indian economy from collapsing.
The borrowing has hit new record highs over the last two years, rising to Rs 14.21 lakh crore in 2022-23. The budget presented on February 1 pegged it at Rs 15.43 lakh crore for 2023-24.
In 2019-20, the last 'normal' year prior to the pandemic, the Centre's gross market borrowing was Rs 7.1 lakh crore. While it is unlikely to fall to such low levels, discussions are ongoing to lower the annual gross market borrowing over the next three to four years. This, sources said, could happen if the government remains committed to its medium-term fiscal deficit target of 4.5 percent of GDP by 2025-26.
Also Read: Moving the goalposts — fiscal deficit target and a 20-year delay
"The gross borrowing should come down meaningfully in the next few years if we are committed. The fiscal deficit target for 2025-26 is 4.5 percent. By then, the nominal GDP will be closer to Rs 400 lakh crores. If we continue to get Rs 4-4.5 lakh crore from small savings, then the gross borrowing should be around Rs 12-13 lakh crore if the commitment to the fiscal glide path goes through," the source added.
The central government funds its fiscal deficit through a mix of borrowings from the bond market, proceeds from small savings schemes, and the draw down of its cash balance.
India's nominal GDP in 2022-23 was Rs 272 lakh crore. Assuming a nominal GDP growth of 10.5 percent – as assumed in the 2023-24 budget – India's nominal GDP could rise to Rs 406 lakh crore in 2026-27.
The Centre, which is scheduled to borrow Rs 6.55 lakh crore in the second half of 2023-24, had reduced its gross market borrowing by Rs 10,000 crore in 2022-23.
Moneycontrol had previously reported on August 24, quoting a senior finance ministry official, that a surge in India's small savings collections may give the government room to lower its borrowings through government securities in October 2023-March 2024.
Comfort with bond yields
The government's market borrowing is an important determinant of interest rates for the rest of the economy. If the government decides to borrow a lot, it will reduce the funds available to companies and push up borrowing costs. As such, the government tries to keep a tight leash on how much it borrows.
Yield on the benchmark 10-year government bond was at 7.19 percent on September 13. According to the source cited above, the Central Government would be comfortable ending 2023-24 with the 10-year bond yield at 7.2 percent. "We were told initially to keep it at a maximum 7.5-7.6 percent. So, if we close the year 30-40 basis points lower despite inflation having peaked, it's not bad."
Data released on September 12 showed that India's headline retail inflation rate had cooled to 6.83 percent in August from July's 15-month high of 7.44 percent.
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