Centre’s new mode to meet borrowing target
It will be a challenging task to prevent acute stringency in the money market in the coming months in the absence of sizable forex inflows.
The efforts to reverse the growth recession with stimulus packages of the Centre are bearing fruit with the inherent resilience of the economy helping the recovery.
A year ago, the deepening recession in the U.S., Britain, European Union and elsewhere had a severe impact on India’s foreign trade and indeed on its industrial sector. However, the positive trend in industrial output since April this year, after the slide in October-March, strengthened the hopes of a reversal of the recessionary trend.
Luckily for the Finance Ministry, new loans could be issued on a cheaper basis in the second half of 2008-09. The banking system had ample liquidity and individual institutions were avidly absorbing new loans even with lower coupon rates.
The gross amount raised in the past year was as much as Rs. 3,18,550 crore against Rs. 3,06,000 crore and net borrowing Rs. 2,66,539 crore against Rs. 2,61,972 crore (2008-09 Revised). As there were also other debt receipts, the fiscal deficit was estimated at 6.2 per cent in the provisional budget against 6 per cent (revised) and 2.5 per cent (Budget).
The revenue deficit also should have been slightly higher than the postulated 4.4 per cent (revised).
The big step up in borrowing was facilitated by sizable purchases of securities issued earlier under the Market Stabilisation Scheme (MSS) by the Reserve Bank in pursuance of open market operations. The concurrent new issues by the Central Exchequer were welcomed for their attractive yields.
Banks avid buyers
Banks thus extended substantial support to the borrowing by the Centre and the States with fresh investments in government approved securities sizable at Rs.1,94,696 crore or 30.56 per cent of incremental deposits in 2008-09 while fresh bank credit of Rs. 4,13,636 crore worked out to 64.92 per cent of incremental deposits. Deficit financing, per se, could be avoided, thanks to liquidity of the banking system. The fiscal deficit should be reckoned higher than the indicated figure as no account has been taken of the sizable issue of petro and fertilizer bonds. It has been explained that these loans have not been included in the fiscal deficit as there was no immediate cash outgo.
Market borrowing has been brisk so far this year as demand for credit from industry picked up only recently and export demand was low. New loans for as much as Rs. 2,95,000 crore could be raised in April-September against the target of Rs. 2,41,000 crore. Additions to deposits up to September 11 were Rs. 2,55,682 crore (Rs. 2,05,603 crore), incremental credit Rs. 50,408 crore (Rs. 1,33,644 crore) and incremental investments Rs. 1,81,782 crore (Rs. 29,614 crore).
The large amounts realised through issues of loans under the MSS could be utilised for repurchase of the loans under reference by the RBI.
The balance of Rs.1,96,000 crore has to be found in the coming months. Aggregate gross and net borrowing may be higher than visualised earlier as non-Plan revenue as well as capital expenditure will be rising unexpectedly with heavier burden of subsidies and the compulsion to provide large amounts to drought affected states for relief operations.
Ways and means
In spite of heavy borrowing in the past six months the Centre’s ways and means position has not improved. On the other hand, it has been even necessary to secure RBI’s assistance in the form of cash management bills. While the amount involved is not known, yield on these bills is higher than reverse repo rate and banks have been keen to invest surplus resources in these bills albeit temporarily. It remains to be seen whether expectations in this regard will materialise as industrial output has been rising impressively and the growth was 4.6 per cent in April-July. The uptrend may remain and the year may end with 6-7 per cent industrial growth against 3.4 per cent and 8.5 per cent in the two previous years.
World Bank loans
The borrowing programme in October-March can succeed only with larger FII inflows and FDI. There has also been increased debt inflow with keener buying of government securities by foreign interests. However, there should not be any preemption of investible resources by the Centre as State governments also have been eager borrowers.
The Finance Minister is anxious to avoid a cash crunch even while preventing an enlargement of the fiscal deficit. Towards this end, an amount of $4.3 billion will be received from the World Bank through three long term loans.
For injecting capital into select public sector banks a 28-year loan for $ 2 billion will be available, with a coupon rate of 6 months LIBOR plus 55 basis points.
Similarly, the infrastructure sector will get a 30-year loan of $ 1.2 billion. This will help the Indian Infrastructure Finance Co (IIFCL) in refinancing the banking system.
At the same time this institution will be raising Rs. 20,000 crore in tax-free bonds. This amount can be increased to Rs. 30,000 crore later if need be. Power Grid Corporation for its part will benefit by a 30-year loan for $1 billion on the same advantageous terms. The three loans can be secured in a single tranche and the World Bank will be agreeable to extend further support in the light of new happenings.
Fresh developments in the coming months have therefore special significance and it will be a challenging task to prevent acute stringency in the money market in the absence of sizable forex inflows. Happily these have risen this year by about $23 billion up to September 18 against a decline of $16 billion in the same period last year. There may be faster additions under this head in the coming months. The increase in a whole year may be around $50 billion, if not more.
If the requirements of the industrial, agricultural and other sectors can be fully met, the growth in GDP may be higher than the earlier estimate of 6.5 per cent. The uptrend may be sustained in 2010-11 when GDP may grow by over 7.5 per cent. The Prime Minister has expressed the hope that the economy will be placed on the 9 per cent growth path in 2011-12.
P. A. SESHAN
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