Prospects for current year

THE BORROWING programme of the Central Government for the current financial year is likely to be more challenging for the Union Finance Ministry than in 1999-2000. This is due to the fact that for the third year in succession net borrowing through market loans has been rising in a disturbing manner. In the Budget estimates for 1999-2000 net borrowing was placed at Rs. 57,461 crores. But in the Revised estimates it was much higher at Rs. 77,065 crores as the fiscal deficit got enlarged to Rs. 108,898 crores (Revised) from Rs. 79,955 crores (Budget). In 1998-99 also there was a similar experience as net borrowing amounted to Rs. 68,988 crores (Actuals) against Rs. 64,911 crores (Revised) and Rs. 48,326 crores (Budget). This was because of an increase in the fiscal deficit to Rs. 103,737 crores (Revised) from Rs. 91,025 crores (Budget). In 1997-98, the fiscal deficit was Rs. 88,937 crores (Actuals) against the Budget estimate of Rs. 65,454 crores (on the old basis).

In the last two years, the RBI could enable the Central Exchequer secure its requirements on a staggered basis and reduce also the cut-off yields on various types of loans. Besides, an effort was made to issue medium and medium-long dated loans for obviating a bunching of maturing loans in the next decade. As the monetary authorities were keen to minimise net RBI credit to the Centre, large net open market sales were effected after the borrowing programme of the Centre had been completed nearly fully in 1999- 2000. For the first time in recent years, the Union Finance Minister, Mr. Yashwant Sinha, could proudly claim that there was no monetised deficit in 1999-2000 as even the outstanding amount against ways and means limit provided by the RBI could be fully repaid at the end of March.

The heavy borrowing by the Centre and record net open market sales resulted in full absorption of the surplus resources of scheduled commercial banks (SCBs) as there was also an uptrend in aggregate advances in October-March 1999-2000. The release of Rs. 13,250 crores out of immobilised cash balances of member banks with a reduction in the cash reserve ratio (CRR) by two percentage points in April and November in the past year came in handy. However, the increase in investments in government and approved securities was Rs. 53,851 crores and in advances Rs. 79,109 crores or a total of Rs. 132,960 crores. This amount exceeded incremental deposits of Rs. 117,516 crores in the 12 months ended April 21, 2000. In the corresponding period in earlier year, incremental investments and advances had accounted for only Rs. 79,247 crores out of incremental deposits of Rs. 113,359 crores. The credit deposit ratio has thus risen to 53.50 per cent and the investment deposit ratio to 38.10 per cent from 51.24 per cent and 36.84 per cent respectively. The cash deposit ratio also has dropped to 8.45 per cent from 10.28 per cent.

It is against this background that the borrowing programmes of the Central and State governments have to be completed in the current financial year. Thus, with a view to lowering interest rates and enabling also the privileged borrowers to secure their requirements on a cheaper basis, the Bank Rate was reduced to 7 per cent from 8 per cent with effect from April 1 this year. The CRR also has been reduced by one percentage point to 8 per cent from 9 per cent in two stages in April resulting in an addition to lendable resources to the extent of Rs. 7,200 crores.

Following the lowering of the Bank Rate, many banks have reduced their lending rates along with downward adjustments in deposit rates for obviating a noticeable erosion of profitability. Besides, the rates for medium term loans have been adjusted downward by the development financial institutions. These new developments have enabled well managed industrial enterprises to issue non-convertible redeemable debentures (NCDs) maturing after seven years at even 11.50 per cent.

It is, however, being discussed in money market circles whether the yields on new Central loans can be reduced significantly in the coming months as in 1999-2000 in view of the competing demand for funds from borrowers in industry and trade and the larger gross and net borrowing of the Central and State governments. Because of the reduced Bank Rate and augmentation of bank funds with a lowering of CRR, the efforts of the RBI to minimise cut- off yields on government securities have been partially successful.

Up to May 3, five Central loans have been issued for an aggregate amount of Rs. 17,000 crores with the floatation of 12.29 per cent 2010 loan for Rs. 5,000 crores on April 11. The cut-off yield was 10.26 per cent. A 9.90 per cent 2005 loan was issued on April 20 with a notified amount of Rs. 3,000 crores. The cut-off yield was 9.88 per cent. On the same date, a 10.70 per cent 2020 loan was offered for Rs. 3,000 crores with a cut-off yield of 10.70 per cent. A 12.25 per cent 2010 loan for Rs. 6,000 crores was issued on May 3 with a cut-off yield of 10.52 per cent. The devolvement in respect of 10.70 per cent 2020 loan for Rs. 2,574.50 crores was on primary dealers and that in regard to the 12.25 per cent 2010 loan was Rs. 514.50 crores on the RBI and Rs. 480 crores on primary dealers.

In April last year, five Central loans were issued for mobilising Rs. 18,000 crores. But three loans - 2013 loan for Rs. 3,000 crores having a cut-off yield of 12.33 per cent, 2019 loan for Rs. 4,000 crores with a cut-off yield of 12.45 per cent and 2013 loan with a lower cut off yield of 12.24 per cent for Rs. 5,000 crores - were privately placed with the RBI. Of the remaining two loans, 2009 loan for Rs. 3,000 crores had a cut-off yield of 11.99 per cent and 2006 loan for Rs. 3,000 crores afforded a yield of 11.68 per cent. It will be clear that the yields on all types of loans are much lower in 2000-01 than on those floated by the issues in April last year. A new procedure has been adopted in the expectation that fresh borrowing by the Centre can be attempted even more advantageously and the downtrend in yields will remain in evidence.

It is perhaps expected by the RBI that the situation can be managed with further downward adjustments in CRR later this year especially as it is hoped that additions to deposits up to March next will be Rs. 125,000 crores. The calculations in this regard may be upset if it becomes necessary to expand credit on the scale of 1999-2000. It also remains to be seen whether there will again be an enlargement of the fiscal deficit as in the past two years.

This deficit will be quite high at Rs. 111,275 crores in 2000-01 Budget against Rs. 108,898 crores in the revised estimates of 1999-2000 and Rs. 79,955 crores (Budget). As heavy expenditure is being incurred on relief operations in the drought affected areas and it is also probable that there will be an increase in defence expenditure and in the devolution of revenues to the States under the revised formula, it will not be surprising if there is an increase in the revenue and fiscal deficits. The situation will become more difficult if the target of Rs. 10,000 crores under the disinvestment programme cannot be realised.

Bulging fiscal deficits'queering effect

On present indications, there may not be any complications arising out of a shortfall in tax revenues from the Budget estimates as the experience in 1999-2000 has been satisfactory. It is, of course, assumed that agricultural production will be maintained at high levels and the gross domestic product (GDP) will rise by over 7 per cent. Since a definite view can be taken about the prospects for the 2000-01 agricultural season only in August, the happenings in the later half of the current financial year have special significance.

As there has been a pre-emption of resources due to heavy borrowing of the Central and State governments for several years in succession, the importance of minimising the fiscal deficit tangibly may not be overemphasised. However, if the assumption of fiscal responsibility is to be meaningful, there will have to be a significant reduction in the burden of subsidies, the salary bill and in the internal debt. Towards this end, the Expenditure Commission will thus have to adopt a pragmatic approach for contracting non-plan expenditure. There will also have to be a big effort to secure larger non-debt resources.

P.A. Seshan

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