The Centre claims that its revised market borrowing programme of Rs 470,000 crore for 2011-12 — almost Rs 53,000 crore up from the Budget estimate of Rs 417,128 crore — will not cause any fiscal slippages. Theoretically, it could be right. The fiscal deficit is the difference between the Centre's total spending and its revenues that include non-debt capital receipts. This gap is funded not only through borrowings via issue of dated securities, but also other sources such as small saving deposits and draw-down of the Centre's cash balances. In this case, the extra market borrowings have been necessitated not by the deficit per se going up, but because of higher interest rates on bank deposits leading to outflows under small saving schemes (as opposed to a net mop-up of Rs 24,182 crore targeted from this source). The argument has, however, failed to convince the market. On Thursday, when the higher borrowing plan was announced, yields on the benchmark 10-year 2021 Government of India stock rose from 8.34 to 8.44 per cent. The market's doubts were reinforced by subsequent official data showing the Centre's fiscal deficit during April-August, at Rs 273,523 crore, to be 81 per cent higher than for the corresponding five months of 2010-11 and, moreover, two-thirds of the budgeted Rs 412,817 crore for the entire current fiscal. The deficit target, then, looks unlikely to be met and that alone may call for more borrowings.

That raises a related issue: Whether the additional governmental borrowings will further drive up interest rates. Those fears seem somewhat exaggerated at this point. Scheduled commercial banks have during this fiscal (till September) seen their deposits grow by Rs 314,066 crore, whereas the corresponding expansion in credit has been only Rs 132,213 crore. The weak demand for credit is also borne out by the banks' incremental investment in government securities, which, at Rs 207,351 crore, is more than the amount they have lent out and even way above the Rs 75,157 crore of sovereign paper purchased during the same year-ago period. Any evidence of liquidity crunch now is restricted to just the short end of the market, with yields on 91-day Treasury bills being slightly higher than on 10-year bonds. Corporates are themselves today resorting to parking their surplus cash with banks — especially in certificates of deposit offering up to 10 per cent for a year — rather than deploying these in an uncertain investment environment. The possibility of private investment getting ‘crowded out', therefore, appears remote for now.

But the absence of competition for funds now cannot still justify runaway fiscal deficits. Large government borrowings can stymie a recovery, just when it is starting to happen. The chances of that are higher if the current global slowdown persists, resulting in a complete drying up of overseas fund flows. In this scenario, high fiscal deficits would crowd out not just private, but even public capital expenditures.

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