On Thursday, Finance minister Nirmala Sitharaman maintained that despite a fresh resurge in cases threatening economic management, key budgetary proposals were ‘on course’. These budgetary proposals include the creation of a state-owned development finance institution (DFI) and an ambitious agenda laid out for privatization to raise revenue for government’s pro spending fiscal budget.
Nirmala Sitharaman stated that, “Since the focus right now was on saving lives, vaccination and addressing the deficits in managing the Covid patients, the question of reliefs to economic agents like another loan moratorium was yet to be deliberated upon”.
Finance minister further stated that front-loading of borrowings by the Centre and states in the current fiscal would emphatically help harness the resources needed to keep momentum of public expenditure, including capital expenditure. The finance minister was speaking at the agenda-setting debate organized by The Indian Express and Financial Times.
Speaking on recent protectionist stance taken by the government on its foreign policy, she stated that recently announced tariff increases were aimed at arresting the influx of ‘end-consumer’ (finished) goods. This was done in the area where domestic capacities were robust, to give a boost to the manufacturing capacity in India which has been recently curtailed due to partial lockdowns effective in various states. She further maintained that protectionist foreign trade policy only targeted the aforementioned areas and not the imports of raw materials and intermediate goods. To justify her argument, Nirmala Sitharaman stated that “We don’t intend to be regressive at all,”.
Talking about the effects of lockdown and covid resurgence on economic activity, Sitharaman stated that only some sectors were being affected significantly due to the situation and the steps announced by the government, for institutional reforms and growth spur, wouldn’t be held back.
Addressing the conference, the finance minister stated that “I will first focus on these measures (oxygen supply and support of critical medicines), and then see how best the economy will have to be addressed. Although I’m monitoring the economy in a very detailed fashion on an everyday basis, at the moment I do not have a plan (on loan moratorium or other measures).”
Government’s borrowing plans
According to the announcements made on March 31, the Centre will borrow a humongous amount of Rs 7.24 lakh crore from the market in the first half of FY22, or about 60% of the full-year budgeted target. It is to be noted that the planned borrowing is higher than 56% in the first half of FY21, when a pandemic lockdown. This had induced the government to expand borrowing substantially throughout the year, especially during the first half of the financial year.
Due to the gross mismanagement between revenue collection and expenditure requirement in the wake of the pandemic, the Centre had also raised its gross market borrowing in FY21 to Rs 13.71 lakh crore, against the revised estimate of Rs 12.80 lakh crore. As for the state’s borrowing, states were also allowed to borrow up to 5% of their GSDP in FY21. For FY22, the states have now been permitted to borrow up to 4% of their GSDP.
It is to be noted that given the large supply of dated Government sectors and state development loans in the coming months, as well as the likelihood of firming of global interest rates, yields are likely to rise. Aditi Nayar, principal economist at Icra stated that “In our view, the benchmark 10-year G-sec yield may harden to as much as 6.35% by the end of Q1 FY2022,”.
The government positively expects the proposed DFI to raise low-cost funds for long-term infrastructure financing. As per reports, it is expected to mobilize as much as Rs 3 lakh crore over the next five years, leveraging initial capital of Rs 20,000 crore. Initially, the government will fully own the DFI but, subsequently as more investors join in, it is willing to dilute its equity to 26%.