NSSF borrowing runs risk of understating fiscal deficit number: India Ratings

The Government has depended on the National Small Savings Fund (NSSF) in FY19, but such borrowing runs the risk of understating the fiscal deficit number, a report said Wednesday.

The Government has borrowed an additional Rs 500 billion from the NSSF to take its total dependence on this route to Rs 1,420 billion or 22.4 percent of the budgeted fiscal deficit in FY19, India Ratings said.

It also said that the GDP growth in December quarter will slow down to 6.9 percent.

Comparing the borrowings to the bonds issued during the last decade, it said the liabilities sit on balance sheets of state run enterprises instead of the government accounts.

"Keeping such liabilities outside the government accounts understates the fiscal deficit/GDP and debt/GDP ratio," the agency said.

It can be noted that figures released Tuesday said the Government has over-shot the FY19 fiscal deficit target by 21 percent. The Finance Ministry has said that there will be a 0.1 percentage point slippage in the gap and exuded confidence of getting the fiscal deficit at 3.4 percent for FY19.

The fiscal deficit is a critical number illustrating the macroeconomic strengths of a country and is considered to be inflationary.

The rating agency said there can be positives as well through the excess borrowings from NSSF, especially easing pressure on the benchmark 10-yr G-sec yield and keeping the cost of governments borrowings through extra budgetary resources (EBR) low.

EBR are the financial liabilities raised by public sector undertakings (PSUs), for which repayments are made using the union government budget, it said.

If the borrowings classified as EBR are included, the gross borrowings will be higher, it said.

Most PSUs that borrow through EBR leverage their strength of being majority government owned public policy entities and the budgetary support they receive from the union government.

The prominent union government PSUs borrowing through the EBR route over the past few years are Nabard, Hudco, Indian Renewable Energy Corporation, REC, NTPC, Power Grid Corporation of India, National Highways Authority of India, Food Corporation of India and Steel Authority of India, it said.

The Government will end up borrowing more than the budgeted quantum from the national small savings fund (NSSF) in FY20 as well, it said.

The Government has budgeted to borrow Rs 1,480 billion or 21 per cent of its fiscal deficit target from the NSSF and state provident funds.

The agency said the borrowings from this source, while they will reduce marginally in FY20, are far more than the 3 per cent of fiscal deficit or Rs 151.45 billion borrowed in FY15.

The states, who were the prime borrowers from this fund earlier, are now relying more on market borrowings (state development loans) to meet their funding needs as per the recommendations of the 14th Finance commission, it said.

Including EBR of public enterprises, the gross borrowings of union government for FY20 will shoot up to Rs 16.8 trillion (8 percent of GDP) in FY20 from Rs 15.3 trillion (8.1 percent of GDP) in FY19.

"EBRs are mostly borrowed for asset creation, which by enhancing the productive capacity of the economy provide a fillip to economic growth and augment government revenue," it said.