Amid economic slowdown, Modi govt sticks to FY18 borrowing target

India’s government on Thursday stuck to its budgeted market borrowing target for the fiscal year ending in March 2018 but held out the possibility of selling additional bonds to fund any new spending.

An economic slowdown following the launch of a nationwide Goods and Service Tax (GST) in July have put federal revenues under pressure, raising worries that New Delhi will struggle to trim its fiscal deficit.

Separately, the Reserve Bank of India said on Thursday it would raise the foreign investment limits for government bonds by 80 billion rupees to 2.5 trillion rupees for the October-December quarter.

The action came after current quotas were almost fully exhausted amid strong buying by foreign investors, as India offers high yields at a time of globally low interest rates.

In February, Finance Minister Arun Jaitley had budgeted to raise 5.8 trillion rupees ($88.57 billion) in 2017/18 via bond sales to bridge the fiscal deficit of 3.2 percent of GDP.

However, the deficit has already crossed 92 percent of the full-year target. Adding to the concern, GST collections fell 3.6 percent in August from July.

Yet, Economic Affairs Secretary Subhash Chandra Garg said that New Delhi would leave the full-year borrowing target intact and sell bonds worth 2.08 trillion rupees ($31.77 billion) between October and March.

“We do not foresee extra borrowing at this point in time, but we are conscious there may be a possibility,” Garg told reporters after a meeting with central bank officials.

ADDITIONAL BOND SALES?

Growth in Asia’s third-largest economy slowed to a three-year low of 5.7 percent in the quarter that ended in June. The slowdown has given the opposition Congress party an opening to regain political ground against Prime Minister Narendra Modi, although the next general election is not due until 2019.

Some government officials including one of Modi’s top policy advisers have called for stepping up government spending even at the risk of busting the fiscal deficit target.

Relaxing the deficit target, however, runs the risk of inviting a censure from credit ratings agencies and could also make foreign investors wary. They have continued to buy into Indian debt, despite recent strong selling in equities, with net purchases of $23 billion so far this year.

While Garg remained non-committal on extra government spending, he said state-run companies would spend an additional 250 billion rupees in the current fiscal year.

Government officials told Reuters last week that they were contemplating spending up to 500 billion rupees more to halt the slowdown, which could widen the federal fiscal deficit by as much as 50 basis points to 3.7 percent.

“At this moment we are going as per our programme,” Garg said. “But we have to be conscious that there may be a possibility...then we will plan for the additional borrowing.”