The National Development Alliance (NDA) government is expected to announce higher borrowing in the upcoming budget to spend on infrastructure projects ahead of Lok Sabha elections in 2024, experts say.
How much is the government borrowing in FY 23?
“The next budget for 2023-24 is going to be crucial, as it will cover the financial year just before the next Lok Sabha elections and the government would like to project its development-oriented approach,” said Jyoti Prakash Gadia, Managing Director at Resurgent India, a category 1 merchant bank registered by the Securities and Exchange Board of India (SEBI).
Ajay Manglunia, Managing Director and Head of Investment at JM Financial, said he expects the borrowing will be similar to the current financial year’s figure at around Rs 15 trillion in the next budget. Some other experts also said any change in the level of borrowing may not be significantly large.
This is because revenue receipts are expected to be robust with buoyant tax collections and government reforms are aiding the shift from the unorganised to the organised sector in the economy. The Centre’s continued investment in capital expenditure will also translate into revenue gains, said Veer Trivedi, a research analyst at Samco Securities.
Experts said typically budgets ahead of elections tend to have a higher borrowing number because ruling parties spend more infrastructure and other development activities. This is likely to benefit them in their campaigning for the elections.
Will it be a front-loading package?
Experts believe that in the next financial year, the borrowing by the government will be front-loaded. This means 50-60% of the total borrowing will be raised in the first half of the financial year, which allows state governments and corporate entities to raise more money in the second half.
“The Centre is likely to front-load its issuance in the first half of FY24,” said Swati Arora, economist at HDFC Bank.
“As we have seen that this year as well, the higher borrowing was efficiently managed and done in a non-disruptive manner. I have no reasons to believe that it could have any difficulties,” Manglunia added. “We expect the borrowing to be equally spread over the next 10-11 months, so as usual in first half, may be close to 55-60% and balance in second half.”
In the current financial year too, the central government has raised major chunk of its borrowing in the first half. It had planned to raise Rs 8.45 lakh crore in the first half of 2022-23 to fund the revenue gap to revive the post-pandemic economy.
The balance amount of Rs 5.92 lakh crore (41.7% of Rs 14.21 lakh crore) is planned to be borrowed in the second half of the fiscal year 2022-23 (H2: FY 2022-23) through dated securities, including Rs 16,000 crore through issuance of Sovereign Green Bonds, according to a statement by the Ministry of Finance.
Pressure on bond yields
The higher borrowing by the government is likely to have an impact on the bond yields. This year, when the government announced the budget, bond yields rose and touched a 30-month high and ended 14 basis points higher on budget day. One basis point is one-hundredth of a percentage point.
On February 1, 2022, the benchmark 6.54%-2032 bond yield was 6.8279%.
“The yields on government bonds are therefore expected to go up a bit, considering the overall interest rate scenario with a consistent rise in repo rate by RBI (Reserve Bank of India) to tame inflation,” Gadia added.
Money market dealers said the movement of the bond yields not only depends on the borrowing program, but also other domestic as well as international cues.
On Monday, the 10-year benchmark 7.26%-2032 government bond yield ended at 7.2254%.
Will it be fully absorbed
The higher borrowing is expected to absorbed by domestic as well as foreign investors.
Trivedi further added that FY24 would comprise of a mix of populist and growth schemes. The populist schemes announced would be needed to be fulfilled in the given year because of elections.
“As we see better demand from long-term investors and expected participation by foreign investors as well, most of it shall be taken by investors without any difficulties and disruptions,” Manglunia added.
