Budget overestimation of borrowing heats up market
Based on the 2022-23 Budget presented by 19 major States, they have budgeted to borrow ₹9.1 trillion in FY23 on an aggregate basis, amounting to 3.5 per cent of GDP, lower than 3.8 per cent of GDP budgeted in FY22. Along with the Center’s planned gross borrowings of ₹15.5 trillion (including Treasury Bills), the total supply of government securities is budgeted at ₹24.6 trillion (or 9.5 per cent of GDP) this year. Compared to gross borrowings of ₹10 trillion (or around 6 per cent of GDP) in the pre-Covid years, this is a significantly higher supply, which is rightly highlighted as one of the reasons for tight bond markets, as the economy is bouncing back.
Since interest payments (Centre and States combined) account for as much as 5 per cent of GDP in India, it is pertinent for the largest borrowing entity in the country to be extremely careful in its borrowing projections. With the combined government debt at around 85 per cent of GDP as of December 2021, inflation running high at around 7 per cent now (and projected to average around 6 per cent in FY23) and because of the potential influence of these budget estimates on the market interest rates, the need to be extra sensitive cannot be underlined more. Still, a look at the budget estimates of States makes one question the importance and objective of this entire exercise. What’s worse, the borrowing projections seem unduly aggressive, leading to an unnecessary tightening in the domestic bond markets.
State governments have announced to borrow ₹145 billion every week, totalling ₹1.9 trillion in the first quarter of FY23. This amounts to 20.9 per cent of the annual budget, marginally higher than the 20.2 per cent announced in Q1 FY22. Interestingly though, States borrowed only about 81 per cent of its announced borrowings in Q1 FY22. Of the 27 States that announced to borrow in Q1 FY22, six States (including Madhya Pradesh) did not borrow any, as many as 12 States borrowed less (with Uttar Pradesh borrowing only 23 per cent of the announced calendar), only one State (Arunachal Pradesh) borrowed as announced and the remaining eight States borrowed more than announced (States like Haryana, Kerala and Telangana borrowed 170-180 per cent of the announced amount).
One could argue that the second wave of the pandemic may have led to this huge divergence between the calendar and actual borrowings in Q1 FY22. However, the actual borrowings by all States were only 86 per cent of the announced calendar in Q2 FY22, 78 per cent in Q3 FY22 and only 73 per cent in Q4 FY22, with large variation among States.
For the full year FY22, States’ gross borrowings were ₹7 trillion, compared to the budget estimates and the announced calendar of ₹8.8 trillion. Only four States (Andhra Pradesh, Bihar, Jammu and Kashmir and Nagaland) borrowed more than budgeted, with the rest 26 States borrowing less.
FY22 was not the first such year. The situation was similar in the pre-pandemic years as well. States’ actual gross borrowings in Q1 FY19 and Q1 FY20 were only 66 per cent and 74 per cent of the announced calendar (It was, however, more than announced in Q1 FY21 due to the pandemic).
For the full-year FY18 and FY19, actual borrowings were only around 86 per cent of the budget estimates, while it was 102 per cent of the BEs in FY20 due to the pandemic in Q4 (when States borrowed 123 per cent of the announced calendar). This trend continues in the first month of FY23 as well. As against the auction calendar of ₹468 billion in April 2022, States borrowed only ₹95 billion — about a fifth of the planned borrowings.
It is actually good news from the market perspective that the governments end up borrowing less than budgeted. However, if the good news is revealed in the 11th or 12th month of the year, the markets have already moved on to the next year by then, shrugging any positive impact on bond yields from lower borrowings by the governments. Instead, if the markets are aware that gross borrowings will be lower by as much as 1 per cent of GDP, it will be difficult to ignore this fact.
Overall, Econ 101 tells us that planning is of paramount importance in financial management. At this time, when the world economy is preparing to witness sharp hikes in the interest rates, sincere effort must be made to be as realistic as possible and avoid unnecessary pressure on the financial markets. Better planning of their budgets, and thus borrowing calendar, would go a long way in easing some pressure on the domestic bond market.
The writer is Chief Economist, Motilal Oswal Financial Services