Commuters cross a road near Chhatrapati Shivaji Maharaj Terminus railway station in Mumbai
Commuters cross a road near Chhatrapati Shivaji Maharaj Terminus railway station in Mumbai | Dhiraj Singh | Bloomberg File photo
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Mumbai: Borrowings by India’s federal government, provinces, and state-run firms are set to cross 13% of the nation’s gross domestic product, threatening to crowd out the private sector from the debt market, according to an HSBC Holdings Plc. note.

Debt sales by these state entities may have also widened the fiscal deficit for the year ended March 31 to 10.2% of GDP from the 9% estimated by the bank before the coronavirus outbreak, HSBC economists Pranjul Bhandari and Aayushi Chaudhary wrote.

“The challenge with the high public borrowings approach, however, is that it is like treading on thin ice,” the economists wrote in the note dated May 19. “Authorities will have to be extremely mindful to ensure that the public sector steps back quickly when the private sector shows signs of wanting to spend/invest.”

Policy makers around the globe have been tapping debt markets as they roll out more stimulus to counter the economic fallout of the pandemic. The private sector makes up 75% of total investment demand, according to the note.

Borrowing costs for state-backed issuers is also on the rise. State-owned REC on Tuesday priced rupee bonds maturing in 10 years at a coupon rate of 7.79%. That’s 24 basis points higher than a similar deal closed last week. Another state-run issuer Power Finance Corp. today priced Rs 48.91 billion ($645 million) of bonds, the fifth issuance by the company in this financial year that started April 1.

How the deficits stack up according to HSBC:

  • The federal government deficit is likely to come in at 6% of GDP versus 3.5% budgeted amid a revenue shortfall and a 1% of GDP as fiscal stimulus. Authorities have already announced 4 trillion rupees of extra borrowing for the current year
  • Provinces have been allowed to borrow up to 5% of state’s GDP versus 3% earlier, subject to reforms. States won’t be able to borrow the full amount and may end up with 4% deficit
  • Government-backed firms may now borrow 3.3% of GDP due to their role in the stimulus package, 0.8% of GDP more than what was budgeted in February
  • The stimulus package has also factored in government guarantees of 2.1% of GDP. While this rise in contingent liabilities is not an immediate problem, it is likely to add to fiscal deficit over time with rise in defaults – Bloomberg

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