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Revised Borrowing Plan

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May 11, 2020

Why in news?

The Union government revised the borrowing plan for the current fiscal year.

What is the concern?

  • India has stuck to the budgeted borrowing target at the beginning of this fiscal year.
  • As per the Purchasing Managers’ Index, the spread of Covid-19 and the ongoing lockdown have severely affected the economic activity.
  • Contraction in economic activity will directly affect government finances.

Why the borrowing target was reached so soon?

  • Government needs to spend on containing the spread of the pandemic and support the economy with significantly reduced revenue.
  • Thus, it has increased the borrowing target by over 50% to Rs 12 trillion in the current year.
  • But this may not be for a fiscal stimulus that many have been waiting for.
  • Additional borrowing might be used to cover the shortfall in receipts.
  • Government will witness shortfalls on account of tax collection, lower dividend from public sector undertakings and disinvestment receipts.
  • They are estimated at Rs 2.1 trillion in the current year.

What would create confusion?

  • The expansion in government borrowing was inevitable.
  • But the manner in which the government borrowing was announced might create confusion in financial markets.
  • The government finances were under pressure even before the pandemic forced a virtual economic shutdown is making things more difficult.
  • Revenue projections for the year were fairly optimistic and would now leave a bigger hole to be filled by borrowing.
  • It is important for the markets to know if extra borrowing would cover the shortfall in receipts.
  • Also, it is important to know if the extra borrowing how the government intends to support the economy at this critical stage.
  • Further, the increase in government borrowing will affect bond yields.

How could the RBI help?

  • It is likely that the Reserve Bank of India (RBI) will try to manage the yield curve through open market operations.
  • But it remains to be seen as to what extent it succeeds with the existing excess liquidity in the system.
  • If inflation is under control and there is no risk to financial stability, the monetary policy committee of the RBI could cut policy rates sharply.
  • This rate cut would have helped the government borrow at lower rates.
  • While the Central government has expanded its own borrowing programme, it is not clear how state governments are expected to manage their finances.

What could be done?

  • It is important for policymakers to effectively communicate their stance in order to avoid uncertainty in financial markets.
  • The government should present a credible macroeconomic picture with a plan to return to normalcy.
  • Transparency and effective communication at this stage can contain considerable damage.

 

Source: Business Standard

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