Government Borrowing Programme - Debt Concepts

A few days ago, the Indian government again increased its borrowing programme for the financial year—this time by Rs 40,000 crore, taking the total debt plan to Rs 5.1 trillion in the for the fiscal year 2011-12. This is the second time the government has raised its borrowing plan for the second half of the fiscal due to rising fiscal deficit caused by a mounting subsidy bill and declining tax revenues. In October, it increased the borrowing programme by Rs 52,872 crore, taking the debt plan for the year to Rs 4.7 trillion. The Union budget had projected borrowing this fiscal at Rs 4.1 trillion. The fiscal deficit is expected to be around 5.5% against the budgeted 4.6%.

So what is the government borrowing programme?

Governments often borrow money to fund additional spending they incur. Governments typically determine an amount that they plan to borrow from the market during the year at the start of the fiscal year. This amount is determined based on the fiscal deficit (equals the government's expenditure minus the government's revenue) projected for the year at that time. Within this overall size, the borrowing needs of the participants viz. central government, state government and guaranteed institutions are accommodated. The higher the fiscal deficit, the higher will be the borrowing requirements of the government. If there is an unforeseen increase in expenditure beyond what was projected at the time of budgeting (such as stimulus plans for the economy) or an unforeseen decline in revenue due to any reason (such as decline in growth or recession), the government has to borrow more than the planned amount. Most corporates prefer to lend to the government since government bonds are issued by the Government of India, which is a sovereign entity and does not have a default risk. Consequently, higher borrowing can crowd out private investments as corporates vie for the same credit pool as government.

How does the borrowing programme impact bond yields?

The spill over from the global financial crisis led to increased borrowing requirements of the government. In addition, higher revenue expenditure such as wages, subsidies (including fuel) and national rural wage schemes led to ain increase in fiscal deficit. Higher crude oil prices this year have also increased the deficit. Increased government borrowing or oversupply of government bonds leads to rise in interest rates or higher bond yields as a rise in supply of bonds would lower their prices. However, the borrowing programme is one of the factors which impacts bond yields. Among other factors inflationary pressures, economic growth and liquidity in the system also impact bond yields.