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Govt to borrow Rs 4.2 lakh crore more: 5 harmful effects on economy

In the last 4-5 years, the government maintained fiscal deficit target of 3 to 3.5 per cent - an acceptable level with a glide path to reduce it to 3 per cent

twitter-logoAnand Adhikari | May 11, 2020 | Updated 17:42 IST
Govt to borrow Rs 4.2 lakh crore more: 5 harmful effects on economy
Not just central government, state governments are also in the market to borrow funds

The government today announced it will borrow Rs 4.2 lakh crore from the market. The total gross borrowing target has now increased from Rs 7.8 lakh crore budgeted for FY21 to a staggering Rs 12 lakh crore. The government needs the additional money to meet coronavirus-related expenditure. It particularly needs to provide support to states gasping for funds. But nothing comes without a cost - the additional borrowing will have negative implications.

Higher Fiscal Deficit

A higher borrowing amid falling revenues will push up country's fiscal deficit. In the last 4-5 years, the government maintained fiscal deficit target of 3 to 3.5 per cent - an acceptable level with a glide path to reduce it to 3 per cent. But this road map is now out of the window; additional borrowing means fiscal deficit will breach the 5 per cent mark. The current borrowing programme is based on the assessment of disruption caused by coronavirus outbreak and subsequent lockdown. Unfortunately, the pandemic is far from over and the government may need more money in near future.

High cost of borrowings

The yields on government securities are likely to shoot up as there is going to be a large supply of securities in the market. The RBI will definitely try to maintain the yield, but pressure will mount as there is only limited money chasing government securities.

Impact on state development bonds

Not just central government, state governments are also in the market to borrow funds to meet coronavirus-related expenditure. However, investors are the same - banks, pension funds, insurance companies. They invest in SDLs (State Development Loans) and central government securities. The yield for state government are also likely to spike. While the RBI has opened the overdraft window for states via increased limit under ways and means advances, the second half of the year would see bunching of all the securities.

Action by global rating agencies

The global rating agencies give a higher weightage to things like government debt and fiscal deficit. Clearly, these two key macro economic parameters are moving northwards. There is likely to be a rating action soon. This has implications for foreign investment in India both in terms of FDI and capital market. The cost of raising money for Indian corporate will move up.

Lesser funds for private sector  

When the government is going to mobilise all the money  from the market, there will be little money left for the private sector. And the banks are the only source for the private sector to get money.

Also read: Coronavirus India Live Updates: Maharashtra lockdown may extend to May-end, hints CM Thackeray; cases-17,974

Also read: Country needs to know when lockdown will be lifted; it's not on, off switch: Rahul tells govt

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