On Friday 08th March, the government announced a revised borrowing calendar for the fiscal year 2020-21. Due to the COVID-19 allocations and lower revenue flows, the government opted to hike the annual borrowing level from Rs.7.80 trillion to Rs.12 trillion. That is a spike of over 50%. The first half is likely to see borrowings to the tune of Rs.6 trillion. This is likely to have multiple macro implications for the Indian economy.
Risk of rating downgrade
When Moody’s downgraded India’s outlook earlier, it had warned that any rating upgrades for India were virtually ruled out. In the last few weeks, Moody’s has consistently warned that any spike in debt levels combined with COVID-19 could result in India’s sovereign rating being downgraded. Currently, India is above Speculative grade and any downgrade from here would push Indian bonds to Junk status. The key parameter would be the fiscal deficit. For FY21, the fiscal deficit has already been hiked from 3% to 3.5% in the last Union budget. However, with borrowings up by over 50%, we could see the fiscal deficit spiking to above the 5% of GDP mark. Moody’s and even Fitch have warned that such an event would be the trigger for a rating down grade. While, these may be emergency measures, rating agencies are unlikely to be impressed by the fact that India has allowed the entire concept of fiscal prudence to go for a virtual toss.
Yields and borrowing costs
The sharp spike in borrowings would mean that despite rate cuts, Indian borrowers could actually find their cost of borrowing go up. The first hint came from SBI hiking the minimum lending rate for home loans by 30 bps. Clearly, SBI believes that the spike in borrowing levels would lead to hardening of yields and result in higher cost of borrowings. That is already evident in the market today. Other than the most blue chip borrowers, most of the others find it really hard to get funds. This is true of most NBFCs and smaller companies across India. This spike in borrowings could also result in a spike in bond yields pushing up the costs across the borrowing spectrum. This also has larger monetary policy implications. It leaves the RBI with little incentive to cut rates in the absence of transmission.
Crowding out borrowers
But, the biggest risk of all could be the crowding out of private borrowers from the market. With central government set to borrow Rs.12 trillion this year and states to follow, private borrowers may have a tough time getting interested lenders. That is not great news for the private sector which is desperately looking for ways of borrowing to buy growth. The government would do well to heed Moody’s warning and at least have a clear time table to bring fiscal deficit back to promised levels!
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