The big issue thrown up by the Budget for 2009-10 is the extent of government borrowing planned for the year. At close to Rs 400,000 crore of market borrowings, it is about four times what was initially planned for the last fiscal year. This is a stupendous figure when seen in another context as well, the size of India’s banking sector. The last financial year saw an increase in total bank deposits of well over 20 per cent, or about Rs 650,000 crore. If the government were to swallow Rs 400,000 crore (or 60 per cent of such a figure) this year, it would leave precious little for anyone else. Bear in mind that the government’s Budget is equal to only 17 per cent of the GDP figure, and that the statutory requirement for banks is to hold government and other approved paper (including state government paper) of just 25 per cent. Pre-empting 60 per cent of bank resources for just the Centre would be therefore an extraordinary situation.
But, of course, all market borrowings by the government are not from the banks; there are others who pick up government paper, like the Life Insurance Corporation. But it does not help that, at the start of the fiscal year, the banks were already overbought on government paper, as this accounted for 31 per cent of total deposits (against a requirement of just 25 per cent). The excess government paper held by the banks was therefore more than Rs 220,000 crore at the start of the year. Even if that 31 per cent ratio were to be maintained through 2009-10, and not lowered as it would ordinarily have been, the banks would be able to pick up only about Rs 200,000 crore of government paper.
This is what underlies the official explanation that only half the Rs 400,000 crore of market borrowings proposed by the government will be through issues in the primary market. The rest, it is said, will be done through options like the Reserve Bank’s open market operations, or OMO. But OMO in India has historically been used on a very small scale; the total in 2007-08 was barely Rs 13,500 crore. That figure shot up last year (when government borrowings ballooned), to over Rs 100,000 crore. If OMO this year is to double further, to Rs 200,000 crore, it goes without saying that it would be unprecedented and might test RBI’s ability to deliver. Equally, what it means is that RBI would add 3.3 per cent of GDP to the money supply—and this surely runs an inflation risk some months down the road.
It is not that the situation is unmanageable; also, the scale of the challenge would depend on the overall context. For instance, RBI managed massive dollar inflows a couple of years ago by sterilising vast quantities of money through what was called the market stabilisation scheme (MSS). So it must be presumed that the government and RBI between them can work out ways of raising enough money to feed the government’s appetite. But the issue goes beyond the management or operational challenge, and extends to the macro-economic consequences of such an appetite for borrowings. It is controlling these that present the additional challenge.
