1. Budget 2024: What's government borrowing? Here’s how it affects fiscal deficit

Budget 2024: What's government borrowing? Here’s how it affects fiscal deficit

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4 min read • Updated: January 31, 2024, 11:10 AM

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Government borrowing has surged to ₹15.43 lakh crore in FY 2023-24 from ₹7.1 lakh crore in FY 2020, primarily due to COVID-19 spending. Finance Minister Nirmala Sitharaman's Interim Budget 2024 aims for fiscal consolidation without major announcements. Reports suggest maintaining gross market borrowings for FY 2024-25 at current levels to manage borrowings effectively. Borrowings, facilitated through securities like G-secs and Treasury Bills, bridge revenue shortfalls. The borrowing calendar, managed by the Department of Expenditure, follows semi-annual patterns for the Centre and quarterly calendars for states. In FY 2024, the Centre plans to borrow ₹8.88 lakh crore in the first half and ₹6.55 lakh crore in the second half, utilizing various instruments including Sovereign Green Bonds and longer-duration securities. Understanding government borrowing is crucial for assessing fiscal health and economic priorities.

The fiscal deficit is an indicator of the shortfall in government revenue and total expenditure in the financial year.

_From ₹ 7.1 lakh crore in FY 2020, the government borrowings shot up to ₹15.43 lakh crore in the current financial year. _

Fiscal consolidation is expected to be in focus in the upcoming Union Budget, according to experts. Finance Minister Nirmala Sitharaman has already indicated that there will be no spectacular announcement in the Interim Budget 2024. In an election year, as the Finance Minister presents the Interim Budget on February 1, all eyes will be on the government’s take on containing fiscal deficit and allocations for Centre’s flagship schemes.

The government borrowings and fiscal deficit are closely linked, and the government is likely to strike a balance between fiscal deficit and the big ticket allocations. Reports suggest that the government is expected to maintain the gross market borrowings for FY 2024-25 at the same level as of the current fiscal.

This possible move will help the government control its borrowings, which have doubled over the past few years, mainly due to COVID-19 spending. From ₹ 7.1 lakh crore in FY 2020, the government borrowings shot up to ₹15.43 lakh crore in the current financial year. The government’s gross market borrowings could hover somewhere between ₹15 to ₹15.5 lakh crore for FY 2025, according to reports.

What is government borrowing?

Government borrowings are financial tools used by the government to meet its spending requirements when the tax and non-tax revenue fall short of the expenditures as per Budget estimates. The government announces a borrowing programme to meet this deficit in the Union Budget.

Government borrowing is essentially a loan taken by the government through the issue of securities called G-secs and Treasury Bills. Common investors, financial institutions, large corporations and, in some cases, even other governments can buy these securities. These borrowings are a preferred tool to meet the government's financial requirements as they offer economic stimulation and increased capital expenditure among other benefits. The details of government borrowings can be found under the Capital Receipts in the Budget document.

The initial proceeds from the sale of these securities give the government the money that it seeks to borrow.

Like any other form of debt, the government has to pay interest on these funds. The government promises to pay back the total principal amount along with the interest at the time of maturity of the securities. However, in some cases, periodic interest payments or coupons are also provided as an option.

Government borrowing instruments like Treasury Bills and G-secs are also rated by rating agencies just like any other form of securities.

Additionally, the government issues special securities to state-owned entities like Food Corporation of India, fertiliser companies and oil marketing companies as compensation in place of cash subsidies. These special securities are usually long dates with higher coupons than regular securities.

Apart from the central government, state governments also use market borrowing through the issue of State Development Loans (SDLs) via auction.

Government borrowing and fiscal deficit

Government borrowings often form a key portion of the government's fiscal deficit. The borrowings are an indicator of the fiscal deficit target set by the government. The fiscal deficit target is revised if the borrowings go up in a financial year.

The fiscal deficit is an indicator of the shortfall in government revenue and total expenditure in the financial year. A fiscal deficit typically takes place due to a revenue deficit or a major hike in capital expenditure. The fiscal deficit target shows how much money the government may borrow to meet the shortfall. In the last Budget, the government had set a fiscal deficit target of 5.9% for FY 2023-24.

What is the government borrowing calendar?

The Centre follows a semi-annual borrowing calendar, while states follow quarterly calendars. The first half of the Centre's borrowing plan is announced with the Union Budget, while the second half may commence in late September or early October.

The government borrowing programme is managed by the Department of Expenditure of the Ministry of Finance. The borrowing programme is finalised by the government in consultation with the Reserve Bank of India.

Government borrowings in FY 2024

The Centre announced to borrow ₹8.88 lakh crore via bonds from the market in the first half of the fiscal year 2024. The remaining ₹6.55 lakh crore of the planned ₹15.43 lakh crore borrowing in FY 2024, was to be done in the second half of the fiscal year 2023-24 (H2FY24). The borrowing was intended to be done through dated securities, including ₹20,000 crore through the issuance of Sovereign Green Bonds (SGrBs). The gross market borrowing of ₹6.55 lakh was planned to be completed through 20 weekly auctions. Responding to market demand for longer-duration securities, 50-year securities were planned to be issued for the first time.