India’s central government’s market borrowings for 2023/24 may be lower than expected due to a potential non-rollover of securities used to compensate states for GST shortfalls, according to economists. However, there is a possibility of the central bank providing a higher dividend to the government, potentially leading to a surprise in the budget presentation on February 1st.
Economists predict that the Indian government’s gross borrowing will reach a record high of 16 trillion rupees (approximately $196 billion) for the fiscal year ending March 2024. ICICI Securities Primary Dealership predicts that the government’s net borrowing will be 12.5 trillion rupees for the next financial year. Additionally, bonds worth 4 trillion rupees are expected to mature and need to be redeemed during that fiscal year.
Typically, these bond redemptions would be included in the net borrowings to calculate the expected gross borrowings. However, economists Prasanna A and Abhishek Upadhyay have noted that some of these bonds that are maturing were issued as compensation for GST to the states. It’s likely that these bonds will not be rolled over and will be redeemed, which would decrease the gross borrowings.
Economists Prasanna A and Abhishek Upadhyay have estimated that 760 billion rupees of GST compensation bonds are due for maturity in the next financial year and once they are redeemed, the true gross borrowing will be 15.8 trillion rupees. This means that the net borrowings estimate of 12.5 trillion rupees will come down by 760 billion rupees, which is the maturity of the GST compensation bonds.
In the last two financial years, India borrowed 1.1 trillion rupees in 2020-21 and 1.59 trillion rupees in 2021-22. These borrowings were done to provide financial support to the states and to compensate for the shortfall in revenue collections due to GST. These borrowed funds were used to compensate the states for the GST revenue shortfall, which was caused by the economic impact of the COVID-19 pandemic.
After taking into account the redemption of GST compensation bonds in 2022-23, IDFC First Bank estimates the gross borrowing to be 15.50 trillion rupees. To manage the borrowing and debt maturity profile, this financial year, the government has switched bonds worth 1 trillion rupees with the market and the Reserve Bank of India (RBI) by replacing shorter-term bonds coming up for maturity in the next few years with longer-dated securities. This will likely help in spreading out the debt repayment schedule and reducing the refinancing risks.
IDFC First Bank economist, Gaura Sen Gupta, in a note stated that the gross G-Sec issuance can be reduced further by using a combination of switches with the market and the Reserve Bank of India (RBI). These switches, which are a debt management tool, could lower the gross borrowing to 15.1 trillion rupees. This means that the government is using a combination of tools to manage the debt and reduce the gross borrowing by utilizing the market and central bank support, which will help in reducing the refinancing risks and spreading out the debt repayment schedule.
The Reserve Bank of India (RBI), which will announce a dividend after March 31, is likely to have booked higher profits due to large dollar sales. Since 2018/19, the RBI benchmarks dollar sales against its historical cost of buying dollars, which IDFC First Bank estimates at 62.3. IDFC First Bank economist Gaura Sen Gupta said in a note that the RBI dividend is likely to be supported by higher dollar sales, with gross sales tracking at $180 billion for April-November, as compared to $97 billion in the last financial year. This means that the Central bank has been able to book higher profit on its dollar sales, which it can use to pay a higher dividend to the government.
Madhavi Arora, an economist at Emkay Global Financial Services, stated that the higher profits from dollar sales by the Reserve Bank of India (RBI) could enable it to transfer a dividend of close to 1 trillion rupees to the government. This would boost the government’s income and enable it to maintain control over its borrowing. This means that the Central bank’s higher profit from dollar sales could be used to support the government’s budget and help to manage the gross borrowing and debt repayment schedule.