Govt cuts additional borrowing target to Rs20,000 crore for FY18

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New Delhi/Mumbai: Moving to limit the fiscal slippage in 2017-18 ahead of the 1 February budget presentation, the finance ministry on Wednesday pared its additional borrowing requirement before 31 March to Rs20,000 crore from Rs50,000 crore.

Bond prices rose, stock indices surged to lifetime highs and the rupee gained as the markets cheered the announcement.

“Government has reassessed additional borrowing requirements taking note of revenue receipts and expenditure pattern. Requirement of additional borrowing being reduced from Rs50,000 crore as notified earlier to Rs20,000 crore,” economic affairs secretary Subhash Chandra Garg wrote in a Twitter post.

The risk of the government breaching its fiscal deficit target of 3.2% of gross domestic product (GDP) in the fiscal year ending March increased significantly after it exceeded its Rs5.5 trillion full-year borrowing target by November-end because of lower-than-expected revenue collections and higher expenditure.

Government revenues have been under pressure due to a shortfall in indirect tax collections under the goods and services tax (GST) regime, prompting it to announce additional borrowing of Rs50,000 crore in December to fund spending in key sectors of the economy.

Suspected tax evasion and a cut in tax rates on many items have seen GST collections fall progressively since the tax was implemented on 1 July. In December, GST revenue (for the month of November) came in at Rs80,808 crore, falling from Rs94,063 crore collected in August.

Data released by the finance ministry on Wednesday showed that direct tax collections grew by 18.7% this fiscal year up to 15 January, representing 70.3% of the full-year budget estimate, providing a breather to the government.

“Government did not accept borrowings of Rs15,000 crore in last three auctions. Remaining Rs15,000 crore would be reduced from the notified borrowing programme of ensuing weeks,” the finance ministry said in a statement.

In the budget, the government had pegged its aggregate gross market borrowing at Rs5.85 trillion. With Wednesday’s revision, the number now stands at Rs6 trillion.

The reduction in borrowing will result in lower supply of securities and provide some relief to the bond market, where yields had risen because of worries over fiscal slippage.

The yield on 10-year bonds fell 16.6 basis points, its steepest fall since 15 November 2016, to close at 7.222% compared with its previous day close of 7.269%. Bond yields and prices move in opposite directions.

“The government has finally settled on the additional borrowing number that was originally expected in December by the market, and hence the sense of relief. Now that this confusion is behind us, I think bond yields will remain steady till the budget,” said Ananth Narayan, who teaches at S.P. Jain Institute of Management and Research, Mumbai.

On 15 December, RBI deputy governor Viral Acharya said banks must manage interest rate risks on their own and not rely on regulatory forbearance. This added to the woes of bond market participants, especially banks which had hoped for some regulatory leeway to contain losses in their bond portfolios.