Centre's market borrowings may rise 68 pc next fiscal

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Harish Damodaran

New Delhi, Feb. 28

THE Centre's gross market borrowings during 2005-06 are budgeted to grow by 68 per cent, to touch a record Rs 178,466 crore. This is against the revised figure of Rs 106,395 crore in the current fiscal.

The main reason for the borrowings going up substantially in the coming fiscal, according to Finance Ministry officials, is the discontinuation of the debt swap scheme for State Governments.

The scheme allowed States to prepay high cost loans taken from the Centre bearing 13 per cent or more coupons, by swapping these with cheaper market borrowings and special securities issued to the National Small Savings Fund (NSSF).

The official said that the Centre had been using the prepayment receipts from the States to retire its own 10.5 per cent special securities issued in the past to the NSSF.

The NSSF, in turn, re-invested the monies received therein in fresh special securities issued by the Centre bearing 5-6 per cent interest. During 2004-05, the Centre's borrowings from such fresh securities against small savings was Rs 34,015 crore in the revised estimates, compared to the Budget estimate of Rs 1,350 crore.

It is this alternative source of raising money (against the NSSF) that has enabled the Centre to borrow less from the market this fiscal.

In addition, the Centre was able to draw down on its cash balances maintained with the Reserve Bank of India to the extent of Rs 21,025 crore in the revised estimates for 2004-05, against the budgeted Rs 13,597 crore. As a result, the Centre's gross market borrowings in the revised estimates for 2004-05 is expected to be Rs 44,422 crore, below the budgeted Rs 150,817 crore.

However, in the coming fiscal, neither of these two cushions are available. The Centre's borrowings through issue of fresh special securities to the NSSF is budgeted at only Rs 3,010 crore, while drawn down on cash balances would be only Rs 3,140 crore. Therefore, it would have to necessarily raise much larger sums from the market.

Of the total 178,466 crore of gross borrowings, Rs 139,466 crore is budgeted to be raised from dated securities and the rest Rs 39,000 crore through 182/364-day Treasury bills. In contrast, the Centre's dated security auctions have yielded just Rs 80,000 crore during the current fiscal.

Apart from higher borrowings by the Centre, the money market will also have to deal with extra borrowings by the State Governments.

The reason here is the decision to do away with Central assistance to State Plans in the form of loans and allowing States to raise the required sum (over Rs 29,000 crore) directly from the market, in accordance with the Twelfth Finance Commission's recommendations.

To that extent, the Centre's lower market borrowings would translate into additional market borrowings by States.

All this would have a bearing on interest rates, including the cost of the Centre's market borrowings, which, since the start of the current fiscal, has gone up by about 250 basis points.

(This article was published in the Business Line print edition dated March 1, 2005)
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