The Hindu Business Line : ‘Off-budget’ bonds beginning to exact toll

New Delhi, Feb. 29 Large-scale issuances of special bonds may have helped the Centre meet its fiscal and revenue deficit targets in the narrow technical sense and that too in the short run. But the fact is that these ‘off-budget’ bonds are already beginning to exact a heavy interest cost, being directly met by the exchequer.

During 2008-09, the Centre is expected to fork out Rs 13,958.14 crore as net interest on bonds issued under the market stabilisation scheme (MSS). This is as against Rs 8,351.34 crore in the revised estimates (RE) for the current fiscal, which again is higher than the originally budgeted Rs 3,700 crore.

Likewise, the interest payable on special bonds to oil companies is budgeted at Rs 5,519.84 crore in the coming fiscal (as against the RE of Rs 3,853.42 crore for 2007-08 and the budgeted figure of Rs 3,425.86 crore). During 2008-09, the Centre is slated to also shell out Rs 1,319.26 crore as interest on special bonds issued to the Food Corporation of India (FCI) and Rs 629.72 crore on similar paper forced on fertiliser companies.

In all these cases, the issue of securities add to the Centre’s liabilities. But since the monies raised from these are not supposed to be used for meeting its own expenditures, they do not technically finance the fiscal deficit (which measures the Centre’s gross borrowings, arising from the gap between its total expenditures and total revenues from current as well as non-debt capital receipts).

Thus, issuances of MSS bonds are mainly meant to suck in liquidity from the market arising from excess forex inflows. The interest on MSS bonds, then, represents the cost of ‘sterilisation’, so as to prevent undue appreciation of the rupee. In other words, a subsidy of sorts to exporters. Between 2004-05 and 2008-09 (Budget estimate), outstanding dated securities issued under the MSS have shot up from Rs 25,000 crore to Rs 1,91,000 crore.

But when it comes to oil, fertiliser and FCI bonds, even the traditional fiscal deficit logic may not hold. Normally, whenever the oil companies, fertiliser units or FCI are forced to sell products below their cost or fair market realisation, the difference is footed by the Centre. This gets reflected in the subsidy bill.

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