North Block has turned savvy in dealing with the govt's borrowing programme

Backloading the government's borrowing programme suggests the finance ministry's confidence in better revenue numbers

The Union finance ministry has of late become a little savvy as far as dealing with the government’s borrowing programme is concerned. This is a refreshing change from the ham-handed way it dealt with such issues even three months ago. 

In the last week of December, the finance ministry announced that its borrowing programme would have to be raised by Rs 500 billion for 2017-18. With the next Budget still about two months away, it was unusual for the finance ministry to have apparently given up on its efforts to shore up the government’s finances. That this act of virtually throwing in the towel could happen even before the end of the year’s third quarter was a surprise.

The bond markets responded appropriately. The yields on government bonds shot up. That this happened just about a week before the banks were to close their books for the third quarter was a rude shock for all entities that had held these bonds. Under the marked-to-market rules, the banks were to take a hit on the bonds. Public-sector banks (PSB), already stressed for a variety of other reasons, were more worried as they accounted for a large chunk of these bonds in the market.

The question arose: Could the finance ministry have made that announcement a little later and saved the banks from the marked-to-market hit? This question became even more important when by the middle of January, the finance ministry announced that it could actually make do with a much lower level of additional borrowing of only Rs 200 billion, representing a cut of about 60 per cent. The inescapable conclusion then was that the finance ministry may have acted in a hurry and a bit prematurely as a result of which the bond yields spiked more than they would have in the normal course and PSBs took an avoidable hit on their books. 

Last week, the finance ministry looked to have redeemed itself. There were no such ham-handed or premature actions as were seen three months ago. Instead, it made public the government’s borrowing programme for 2018-19 in a manner that soothed the bond market.

The borrowing calendar was backloaded to reduce the pressure on the bond market in the first half of the year. Only 47.5 per cent of the total borrowing programme was to be met in April-September 2018. This was a departure from past years, when usually 60-65 per cent of the borrowing was scheduled for the first half. 

In addition, the finance ministry also made public its intention to seek greater recourse to small savings funds, which would also reduce the pressure on the bond market. Instead of drawing Rs 750 billion from the National Small Savings Fund (NSSF), it decided to tap Rs 1 trillion from NSSF, an increase of Rs 250 billion or about a third of the originally planned amount.

The move has three implications. One, the bond market has already reacted positively with yields on government securities dropping by about 20 basis points. This augurs well for the government’s huge borrowing programme. Two, banks, particularly the PSBs, have been relieved somewhat as their marked-to-market holdings of such bonds for the fourth quarter and indeed for the entire year have benefitted.

Three, coming as it does just a few days before the Reserve Bank of India is due to release its bi-monthly monetary policy review on April 5, the finance ministry’s borrowing plan will be seen as a gentle nudge to the Monetary Policy Committee members of the central bank to consider the need for a more accommodative interest rate policy. The inflation trajectory has turned benign and the finance ministry has indicated to all that it will borrow less from the market. Whether the RBI heeds these signals or not, you will know on April 5.

But the finance ministry’s backloaded borrowing programme has another message that may have been overlooked. The revenues from the goods and services tax have stabilised and given the current trend, the overall collections during the year might exceed the conservative numbers shown in the Budget estimates for 2018-19. In addition, a slew of public offers of shares from about nine public-sector undertakings, including four from the railways and a few more from the defence sector, and the strategic disinvestment of Air India have brightened prospects for disinvestment revenues exceeding the estimated Rs 800 billion during 2018-19.

The upside of higher revenues will be that the government’s borrowing programme in the second half of the year could be pruned. That explains why the finance ministry will borrow less in the first half of the year and keep open its options for borrowing in the second half. Who knows that the finance ministry may offer yet another pleasant surprise in September by reducing the borrowing programme for the second half of 2018-19, if revenues become more buoyant!