How government has made it tough for RBI, industry

How government has made it tough for RBI, industry
The Financial Express, July 9, 2009, Page 6

Sunny Verma

Corporate India could find it difficult to raise bank finance at attractive rates in the near term. The Centre’s heavy debt programme could potentially eat up a large chunk of funds. The government’s gross borrowings are estimated to rise to Rs 4,51,093 crore in 2009-10, up from Rs 3,62,000 crore announced in the interim budget. To get perspective on this debt plan, note that it is significantly higher than the amount of deposits households parked with banks. Indian households’ financial savings stood at Rs 7,34,653 crore in 2007-08, of which over 55% or Rs 4,06,631 crore was in bank deposits, as per the latest estimates available with RBI.

One can argue that the government will be borrowing more than the savings generated by small savers in the economy. The government’s net borrowings, excluding repayments, are pegged at Rs 397,957 crores in 2009-10 up from an interim budget estimate of Rs 308,647 crores.

The Centre will raise market loans to bridge as much as 99% of the projected fiscal deficit of 6.8% of GDP in 2009-10. RBI, the government’s de facto debt manager, will have a tough time, especially in the second half of this fiscal that starts from October. By that time, which is also considered the busy season by bankers since credit demand is high, the economy is expected to turn the corner. That will sharply push up demand for credit from the corporate sector. The only comfort one can draw is from the net amount RBI will have to raise in the remaining part of this fiscal: Rs 1,69,000 crore. RBI has already raised Rs 1,62,000 crore. It can turn Rs 33,000 crore of market stabilisation scheme bonds into normal debt. This leaves extra borrowings of Rs 38,000 crore.

Still, this will be a daunting task in light of the fact that state governments also plan to raise significant funds from the market. States have completed borrowings of only Rs 20,000 crore in the first quarter out of their estimated borrowings of Rs 1,26,000 crore, in 2009-10. So, another Rs 1.06 lakh crore worth of bonds can potentially be pumped into the market. This would put upward pressure on interest rates, bond yields and negative pressure on India’s ratings. These factors, coupled with the crowding-out effect these borrowings will have on corporate investment, could potentially obstruct the recovery process.