 "Decoded: What is the government borrowing programme and calendar?")
Government borrowing plays a pivotal role in shaping a nation's fiscal landscape. It is a mechanism through which governments acquire funds to fuel their various expenditures, from public services to infrastructure development. The borrowing programme is implemented through the borrowing calendar and is announced twice in a financial year. How does government borrowing work, and how is it implemented? We explain it here:
What is government borrowing?
Government borrowing is the process by which a government secures financial resources to meet its expenditure requirements. In India, this is primarily achieved through issuing government securities known as G-secs and Treasury Bills (also known as T-Bills). These borrowed funds are categorised under capital receipts in the Budget document, emphasising their importance in financing the government's activities.
The need for government borrowing arises when the revenue generated from taxes and other sources falls short of covering the expenses outlined in the government's budget. Consequently, the government announces an annual borrowing programme in its budget to bridge this fiscal gap.
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Market borrowing and special securities
Under the umbrella of market borrowing, the Indian government also issues special securities to entities like oil marketing companies, fertiliser companies, and the Food Corporation of India. These are often referred to as oil bonds, fertiliser bonds, and food bonds, respectively. These securities serve as compensation to these entities in place of cash subsidies and are typically long-dated with slightly higher coupons than regular securities. While they do not qualify as statutory liquidity ratio (SLR) securities, they are eligible as collateral for market repo transactions.
State Governments participate in market borrowing by issuing State Development Loans (SDLs). These securities, issued through auctions, serve as a means for state governments to raise funds. Like central government securities, SDLs qualify for SLR and can be used as collateral for market repo transactions.
What is the government's borrowing calendar?
The Centre adheres to a semi-annual borrowing calendar, while states follow quarterly calendars.
The first half of the Centre's yearly borrowing plan is announced with the Union Budget, while the second half may commence in late September or early October.
In a recent announcement, the government stated its plan of market borrowing of Rs 6.55 trillion. This will phased out over 20 weekly auctions, offering various tenures ranging from 3 to 40 years, between October and March.
In the statement issued by the Ministry of Finance, the Centre added that there may be modifications in the borrowing calendar "in terms of notified amount, issuance period, maturities, etc. and to issue different types of instruments, including instruments having non-standard maturity, floating rate bonds (FRBs), CPI linked inflation indexed bonds (IIBs). This, however, depends upon the requirement of the Government of India in relation to the evolving market conditions and other factors.
Where does the government borrow from?
The government relies on various sources for borrowing, including:
Market borrowing: This is the primary source of financing the fiscal deficit.
Small savings funds: Funds collected through various small savings schemes contribute to government borrowing.
State provident funds: These funds are another avenue through which the government secures loans.
External assistance: The government may receive financial assistance from international sources.
Short-term borrowings: These are typically short-term loans the government acquires to manage temporary financial needs
Who manages the borrowing programme?
The Department of Expenditure under the Ministry of Finance handles the Government of India borrowing programme.
The borrowing programme is finalised by the Government of India in consultation with the Reserve Bank of India.
Impact of government borrowing on the economy
Government borrowing has a dual impact on the economy. Firstly, when the government borrows extensively from the market, it leaves limited space for private sector entities and corporations to access the market for their financing needs. This can crowd out private investment.
Secondly, substantial government borrowing can lead to increased interest rates across the board. This, in turn, raises the debt repayment burden of the government and drives up the cost of borrowing for other entities. High-interest rates can also hamper economic growth by discouraging investment.
The borrowing programme for H2FY24
In a recent announcement, the government revealed plans to borrow Rs 6.55 trillion in the second half of the financial year 2023-24. This borrowing includes the issuance of Sovereign Green Bonds (SGrBs) worth Rs 20,000 crore. The government aims to meet its fiscal deficit primarily through market borrowings.
The gross market borrowing of Rs 6.55 trillion will be conducted through 20 weekly auctions, offering various tenures of three, five, seven, 10, 14, 30 and 40 years. The government will continue to carry out the switching of securities to smoothen the redemption profile.
Out of the Rs 1,00,000 crore of budgeted (BE) switch amount, Rs 51,597 crore of switch auctions have already been conducted, and the balance amount of switch auctions will be conducted in the second half. Further, the government will continue to exercise the greenshoe option to retain an additional subscription of up to Rs 2,000 crore against each of the securities indicated in the auction notification.
Weekly borrowing through the issuance of Treasury Bills in the third quarter of the fiscal is expected to be Rs 24,000 crore, with net borrowing of Rs (-)52,000 crore during the quarter.
The ministry said that the Reserve Bank of India has fixed the Ways and Mean Advances (WMA) limit for the October-March period of 2023-24 at Rs 50,000 crore to take care of temporary mismatches in Government accounts.