Weighed down by higher expenses due to the devastating impact of the Coronavirus pandemic on the economy, the government on Friday said it will borrow about Rs 12 lakh crore from the market in the fiscal year 2020-21, a massive increase of Rs 4.2 lakh crore, or 54% jump over the Budget estimate of Rs 7.8 lakh crore. The decision for higher borrowing has also been prompted by severe loss of government revenues because of stalled economic activity across the country due to the stringent lockdown, economists said.
This, the economists said will push the fiscal deficit from the targeted 3.5% for 2020-21 to 5.5%. GST revenues, as well as those from direct and indirect taxes, are under severe strain while asset sales in state run companies which were expected to fetch much needed revenues have stalled in the midst of the Covid-19 pandemic. There have been increasing calls to unveil a massive fiscal stimulus to help several sectors of the economy overcome the severe impact of the Covid-19.
The government and the RBI have taken some measures to help the poor and the financial markets as well as get lending going but Indian industry has called for a large stimulus to help sectors hit hard by the pandemic restart their activity and help in restoring growth. Between May 11 and September 30, over 20 weeks, the government will borrow Rs 30,000 crore every week by auctioning its bonds of between two-year and 40-year duration, data on RBI website showed. So far since April 9 and May 8, the government has already borrowed Rs 1.06 lakh crore from the market. “The estimated gross market borrowing in the financial year 2020-21 will be Rs 12 lakh crore in place of Rs 7.80 lakh crore as per Budget Estimate 2020-21. The above revision in borrowings has been necessitated on account of the Covid-19 pandemic,” the RBI, which conducts these weekly auctions, said.
Economists said the higher market borrowing will help the government meet the needs for a stimulus and extra spending as a result of the pandemic. “The announcement of additional borrowing reflects the possible loss of government revenue as economic activity continues to be in lockdown mode. Such announcements of additional borrowing had also happened post global financial crisis and currently reflects the impaired state of government finances of both Centre and States with no activity. We believe this move will allow the Central Government to partially mitigate the revenue loss in the interregnum,” said Soumya Kanti Ghosh, group chief economic adviser at State Bank of India. The government’s chief economic adviser Krishnamurthy Subramanian in an interview to TOI on Friday had said that market borrowings was an option to raise funds to additonal expenses and the size of the stimulus should in line with the tax to GDP ratio of the country.
A report by SBI on April 3 had mentioned that with the Covid-19-related expenses going up while at the same time governments’ revenues have been hit severely due to closure of most economic activities, borrowings by central and state governments were expected to go up. “We believe the states require more support from the centre as their finances are significantly stressed given that they are the last mile of Covid-19 deliveries and also because the possibility of large slippage in central government finances is now a reality,” the report had said.
With the central government now expressing its intentions to borrow about Rs 4.2 lakh crore more than what was planned, economists now believe even states will soon come out to borrow more to meet additional expenses. This additional borrowing is sure to push up the fiscal deficit target from the current 3.5% level, they said. The announcement of a hike in government’s borrowings came on a day it introduced a new 10-year bond which will now be the benchmark. The new 10-year gilts were priced at 5.79% per annum and closed the day’s trading at 5.71%, an 11-year low level.