Government Focusses On Deficit, Cancels Borrowing Plan

On February 18, 2013, the government announced the cancellation of its Rs 12,000 crore market borrowing plan, which it was supposed to finalise on February 22, 2013. This step came ahead of the government’s revised fiscal deficit target of 5.3 per cent for FY2013. According to media reports, the budgeted gross borrowing is estimated at Rs 5.69 lakh crore for FY13, of which the government has already borrowed an approximate amount of Rs 5.58 lakh crore till date. This makes for 98% of its initial estimate.

The 10-year bond yield has shown signs of softening from the beginning of 2013. On an YTD basis, it has softened by around 17 basis points to 7.83%. The government’s cancellation of the borrowing plan would further see a drop in the yield.

The twin deficit (fiscal and current account) is currently a major concern for our economy, and curbing them is of the utmost importance. Even the Reserve Bank of India (RBI) Governor D Subbarao, has raised concerns over the rising deficit, which according to him would leave a limited scope for slashing the rates going ahead.

Overall, we believe that the government’s move of cancelling the market borrowing looks challenging, though positive. The government has been successful in its recent divestments which, on an aggregate basis, have provided a cash inflow of around Rs 21,500 crore till date. The government had budgeted Rs 30000 crore from the divestments of its stake for FY2013, and hence the remaining amount of around Rs 8500 crore would probably be achieved by the end of March 2013. This is because the markets are trading higher and the government would get the best price at this point of time. Also, tax collection for the period from April to January 2013 is higher approximately by 12.5%, helping the government to have excess cash than the budgeted amount.

Further, the government has recently taken some bold steps to reduce the cash outflow. A partial roll-back of subsidy on LPG, de-regulation of diesel in the coming months (a Rs 0.50 hike every month), rise in railway fares, which is bound to improve the overall railway finances, are some of these steps taken to ease the government finances. Nevertheless, we believe that the government at present has taken a wait-and-watch approach, to assess the near-term scenario and may probably conduct the revised borrowing program towards the end of March 2013 in order to meet the deficit target.

Earlier in the month of January 2013, the Finance Minister had suggested bringing down the fiscal deficit by 60 basis points every year, for four consecutive years until it reaches 3%. We all know that this guidance by the FM is very robust and it would indeed be challenging for him to manage the receipt and expenditure sides for achieving the desired target.

Considering this scenario, an estimated fiscal deficit target for FY14 would be 4.7 %. The markets are thus waiting for the budget announcement, which is scheduled on February 28, 2013, followed by the FM’s road map for the next fiscal.