Revised Borrowing Plan

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