Hitting the mark: Govt on course to stick to FY24 borrowing target

Next financial year also likely to see similar target

The government is unlikely to overshoot its borrowing target for the current financial year (FY24) as the Centre plans to stick to its fiscal consolidation path, bond market participants said.

It plans to borrow Rs 15.43 trillion (gross) in FY25, out of which Rs 6.6 trillion is likely to be taken in the second half.

Market participants suggested that the central government's borrowing plan for the upcoming financial year may not be significantly higher compared to this financial year. This is because even though the Indian economy is growing, the government may constrain its expenditure in order to meet its fiscal consolidation target.

“We do not expect the H2 (second half of the current financial year) borrowing calendar to be exceeded in the financial year 2023-24. For the financial year 2024-25, we peg the gross borrowings at around Rs 15 trillion,” said Aditi Nayar, chief economist at ICRA.

Market analysts suggest that the government may lower the fiscal deficit target by approximately 50-60 basis points (bps) for the upcoming financial year.

The government's objective of achieving a fiscal deficit of 4.5 per cent of gross domestic product (GDP) by 2025-26 implies a reduction of 140 bps from the current year's target of 5.9 per cent of GDP.

“We expect the Centre to comfortably achieve its fiscal deficit target of 5.9 per cent of GDP for FY24. We see the FY25 Budget setting a deficit target of 5.3 per cent of GDP,” said Rahul Bajoria, managing director (MD) and head of EM Asia (ex-China) economics, Barclays.

India's fiscal deficit, representing disparity between the government's income and spending, touched a peak of 9.2 per cent of GDP in 2020-21 due to Covid disruptions.

It subsequently improved to 6.8 per cent of GDP in 2021-22 and further declined to 6.5 per cent in 2022-23. For the ongoing financial year, the government aims to bring it down even further to 5.9 per cent of GDP.

“The government is expected to stick to the target this year, and may reduce its borrowing slowly starting next financial year,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.

The current quarter poses a significant challenge for the bond market due to the high supply of state bonds.

Despite the additional tax devolution to the states in December 2023, the indicative borrowing by states for Q4 FY24 stands notably higher at Rs 4.1 trillion. Market participants said some states may have signalled borrowing amounts equivalent to their available headroom, potentially exceeding their actual requirements.

Notably, two states alone have indicated a combined issuance of approximately Rs 1.2 trillion in Q4, contributing to the overall increased borrowing figure. Looking at the broader picture, market participants expect an optimistic forecast this calendar year due to an uptick in economic activities in the bond market.

Signs of recovery are already evident, and analysts predict that this positive momentum will only accelerate in the subsequent months. India's inclusion in the global indices and the prospect of interest rate cuts may lead to a sharp fall in yields.