India May Slash Market Borrowings in April Due to COVID-19 Lockdown

Even as you read this article, COVID-19 cases and deaths in India are rising by the hour. Worldwide more than 1 million people have been infected and the death toll is now more than 53,000.

Apart from snatching away the lives of thousands, COVID-19 has dealt a deathly blow on the world economy. It has spared none, but developing and underdeveloped economies are the hardest hit with mounting job losses, starvation among the poor, and lack of essential supplies. In India, the Ministry of Finance along with the RBI has done its bit to lessen the impact such as allowing a 3 month moratorium on loans and infusing 3.74 lakh crores into the banking system.

The Indian government may also take another important fiscal measure and that is to slash market borrowings due to coronavirus lockdown. It is highly likely that the government will reduce market borrowings for FY 2020-21. But, we before get into the details; let’s understand what are market borrowings and why it’s important.

What are market borrowings?

Market borrowings, also called government borrowings, are undertaken by the government when there is a fiscal deficit. A situation where government expenditure exceeds earnings. The government doesn’t take a direct loan but it sells government securities or bonds such as G-secs and Treasury bills. It is simply a loan taken by the government to fund spending on public services, welfare and benefits.

Update on market borrowings slash in India due to COVID-19 lockdown

According to finance ministry and industry sources, one of the reasons for reducing government borrowings may be the decline in trading and volumes in the bond market due to the COVID-19 travel curbs. Rather than increasing market borrowings, the government may consider selling bonds to RBI and LIC. The government currently holds a 100% stake in a LIC.

If the government decides to go forward and finalize a slash in market borrowings due to coronavirus lockdown, it will be the first time in decades that the government has taken such a step in the beginning of the financial year. Earlier in Budget 2020, the Finance Minister had earmarked gross borrowings of Rs. 7.8 lakh crores for FY 2020-21 while it borrowed 4.99 lakh crores for FY 2019-20. However, those figures may change as the economic wind is blowing to an unexpected direction due to the coronavirus crisis.

Reasons why India shouldn’t be increasing market borrowings?

Economists believe that as India’s gross tax revenue collection is on the decline, it’s risky to step up borrowings as it will curb domestic consumption, which is the key to India’s economic revival.

The government’s interest obligation on past debt makes a major chunk of the fiscal deficit. If it increases market borrowings in such a situation, it will lead to higher interest costs which results in a greater fiscal deficit. An increase in government borrowings during the COVID-19 crisis will hurt the government finances and lead to a higher debt-to-GDP ratio.

Additionally, primary dealers who underwrite bond issuances are of the opinion that borrowings in April may not yield positive results owing to lukewarm demands.

What are other options available to the government?

As experts suggest, the government may sell bonds to the RBI and LIC to raise funds to ensure that there is no negative impact on the market. The other option is to use the RBI’s ways-and-means facility, which is similar to an overdraft that the top bank offers to the government.

Latest updates on market borrowings slash in India due to covid19 lockdown

As per latest reports, the central government has decided to scale down its market borrowings to Rs. 4.88 lakh crore in the first half of the financial year 2020-21. The step has been taken to lessen the massive impact of COVID-19 on the Indian economy. This means that the government’s market borrowing will only amount to 62.56% of the proposed borrowing of Rs. 7.8 lakh crore.

According to news reports, the Department of Economic Affairs (DEA) has said that the new borrowing plan was designed in anticipation of increased demand due to the opening of the fully accessible route for non-resident investors. The government is likely to utilize debt exchange traded funds (ETFs) to raise capital this fiscal.

With just 10 days to go before the lockdown ends and no respite in the number of coronavirus patients in the country, it’s uncertain whether the lockdown will end or will be extended. Extension of the lockdown will mean more damage to the economy and refraining extension may put more lives at risk. The government may have to make difficult but well-planned choices in the weeks and months to come.