The government on Friday announced raising its borrowing by over 50 per cent of Budget Estimate during the current fiscal. Additional borrowing means fiscal deficit during the current fiscal could go up by 200 basis points (100 basis points is equal to 1 percentage point).

“The estimated gross market borrowing in 2020-21 will be ₹12 lakh crore in place of ₹7.80 lakh crore as per BE 2020-21,” the Economic Affairs Department, under the Finance Ministry, said. It said the above revision in borrowings has been necessitated on account of the Covid-19 pandemic. The borrowing is used to bridge the deficit between income and expenditure of the government.

The government has also revised the borrowing calendar for the first half period (April-September) and raised it to ₹6 lakh crore, from ₹4.88 lakh crore.

“The Reserve Bank of India, in consultation with the Government of India, reserves the right to exercise the green-shoe option to retain additional subscription up to ₹2,000 crore each against any one or more of the above security, which will be indicated in the auction notification,” it was said. The RBI will also be conducting switches of securities through auction on every third Monday of the month. In case the third Monday is a holiday, switch auction will be conducted on the fourth Monday of the month.

Ordinance route?

Budget for 2020-21 estimated fiscal deficit at 3.5 per cent of GDP (Gross Domestic Product) projected at ₹224 lakh crore. Since, the government has already used the escape clause under the Fiscal Responsibility and Budget Management (FRBM) Act for half a percentage point slippage in the deficit during 2019-20 and 2020-21, it needs to be seen how the additional borrowing would be accounted for. Though the Finance Ministry has not said anything on this issue, the possibility of promulgating an Ordinance to redefine fiscal deficit target or pausing the deficit target cannot be ruled out.

Commenting on the development, DK Pant, Chief Economist with India Ratings, said tax collections and disinvestment proceeds in 2020-21 are likely to be much lower than the BE.

The increased borrowing will help the Government to finance its deficit and undertake fiscal stimulus measures urgently needed to protect the vulnerable section of the society and improve health infrastructure in the country. “Surplus in the system may provide cushion to bond yield,” he said.

According to Aditi Nayar, Vice-President at ICRA, the upward revision in the Centre’s borrowings for the remainder of FY2021, although sharp, was inevitable given the estimated extent of revenue loss following the lockdown.

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