By Ritika Chauhan
The Ministry of Finance has announced plans to undertake additional borrowings worth Rs. 50000 crores this fiscal year. It is claimed that there will be no net additional borrowings as the Treasury bills holdings will be reduced from Rs. 86000 crores to Rs. 25000 crores.
Background
This announcement arrives in contradiction to the governments original plan to limit the fiscal deficit to 3.2 percent, as these additional borrowings will raise the total borrowings to Rs. 63000 crores, subsequently widening the fiscal gap to 3.5 percent. This would be a first for the Modi government, not meeting its fiscal deficit target. It has always been a matter of pride for the present government that they have until now, managed to cap the deficit within the target. Earlier this year in February, Arun Jaitley had made it a key point of his budget speech to commit to bringing down the fiscal deficit.
The government has also committed to bringing the fiscal gap to three percent in the fiscal year 2018-19.
Consequences
The government plans to reduce the T-bills holdings to Rs. 25000 by March 2018 and raise Rs. 50000 crores with the help of dated governmental securities in the fourth quarter of the current fiscal year.
This move is made in light of a reduction in GST collection for November, a continuous decline for the second straight month.
High government expenditure means higher demand in the market, thereby facilitating inflationary tendencies. A high fiscal deficit indicates that a country is unable to earn as much as it willing to spend. This is likely to affect Indias sovereign ratings as well as the confidence of foreign investors. Also, the government will have to pay its debt one way or another. Usually, that way is an increase in taxes. Any interest rate cuts are unlikely.
The overall perception
Economists and experts believe that a breach of fiscal deficit target for this year is inevitable. Although the government believes that there is no net addition to borrowings, it stands true only for January and February. The overall borrowings are bound to rise for the year, thereby increasing the fiscal deficit.
Abheek Barua, chief economist of HDFC, expects a slippage of 0.2 percent in fiscal deficit and finds it sensible to breach the fiscal deficit target as they have already borrowed so much more.
Experts at Kotak Mahindra Ltd believe that the fiscal deficit will settle at 3.7 percent. They attribute this rise to factors including low GST revenues in November, lower tax buoyancy due to subdued growth, lower RBI dividend transfer, and limited rationalisation on the expenditure front.
Indranil Pan, an economist at IDFC Bank Ltd., says that a fiscal slippage of 0.4 percent can be expected in light of recent events. The banks report also commented that to avoid exceeding the target, the government will have to control its expenditure, which, however, is not conducive to growth and development.
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