The gross market borrowing number announced by the Finance Minister of ₹12.05-lakh crore took everyone by surprise as the number was expected to be at least ₹1-lakh crore lesser. Bond markets reacted by sending the yield on 10-year G-Sec 10 bps higher to 6.05 per cent. But there wasn’t too much of consternation as markets recognize that the FM is adopting an aggressive stance of fuelling growth through higher government expenditure, that is to be funded by borrowing.

“Higher borrowings may initially be somewhat concerning for debt markets but with inflation having eased in recent months and with RBI likely to remain supportive, bond markets should stabilize shortly with a minor uptick in market yields,” says Mahendra Kumar Jajoo, CIO - Fixed Income, Mirae Asset Investment Managers.

The growing debt pile of the Centre is however a worry. Total Central government debt outstanding towards the end of September 2020 was ₹107-lakh crore, of which G Secs amounted to ₹66-lakh crore and Treasury Bils around ₹ 11-lakh crore.

“Given the context of the expected normalisation of liquidity, an upward shift in the curve is unavoidable. In this context, continuation of market intervention operations would determine the new trading band for sovereign securities,” says Rajeev Radhakrishnan - CIO - Fixed Income, SBI Mutual Fund.

The pandemic effect

The original estimate for gross market borrowing for FY21 was ₹7.8-lakh crore while net borrowing was estimated at ₹5.44-lakh crore. This number was first revised to ₹12-lakh crore due to the pandemic and then to 13.1-lakh crore to account for the compensation cess payment to States. Due to the extra spending due to the pandemic, coupled with lower receipts, gross borrowing for FY21 is pegged at ₹12.88-lakh crore while net market borrowing is ₹10.56-lakh crore.

According to SBI Ecowrap the Centre’s gross borrowing was already at ₹11.46-lakh crore, as on Jan 22 2021. The FM indicated another ₹80,000 crore needs to be borrowed from the market in FY21. The silver lining is that the Government’s surplus cash balances have increased sharply of late, standing at ₹3.34-lakh crore as on 28 Jan’21 compared to ₹1.08-lakh crore in Sep’20. This seems to be a result of improved tax collections in recent months and lesser avenues to deploy the additional funds.

Borrowing for FY22

This has resulted in lowering the gross borrowing for FY22 to ₹12.05-lakh crore. Net borrowing is pegged at ₹9.17 lakh crore.

Of concern is the fact that the Centre is increasing resorting to lowering the market borrowing by dipping in to other sources such as borrowing against Small Savings. Borrowing under this head amounted to ₹4.8-lakh crore in FY21 and ₹3.9 lakh crore in FY22. Higher borrowing cost on these loans is beginning to pinch the Centre.

We also need to take note of the higher interest expenditure for FY22, budgeted at ₹8.09-lakh crore, 17 per cent higher than the revised estimate of FY21. Of concern is the fact that interest payment is now one of the largest components of revenue expenditure, crowding out the more productive capital spends. Interest cost accounts for 27 per cent of revenue expenditure in FY22.