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How the govt plans to meet the fiscal deficit target
March, 07th 2016

There is going to be some upside to government finances quite early in 2016-17, making the financial year's challenging fiscal deficit target a tad easier to meet. The finance ministry plans to retire about Rs 30,000 crore of government debt ahead of schedule to take advantage of the current market conditions.

This is in addition to Rs 31,000 crore of sovereign debt that the government has planned to raise through public sector organisations, but kept them out of its books, for now.

According to Budget 2016-17, a fat amount of government debt papers - Rs 50,463 crore - will come up for redemption in April. However, instead of waiting till then, the government will redeem two-thirds of that before maturity date.

Taking advantage of the government's strong cash balance position this year, unlike last year, the finance ministry has already done some prepayment in February before the Budget. This pace will now accelerate.

Earlier redemptions free the government from its obligation to pay interest on those papers. Even when reissued with papers of longer duration, the combined effect will lower the total interest bill of the government for 2016-17 from the Budget Estimate of Rs 4,92,670 crore.

The government could get an upside of close to Rs 7,000 crore from the prepayments, says an investment analyst.

The space to juggle with the papers has expanded since the yields on government papers (which run opposite to the price of those papers) have come down. "Since the papers were due for redemption in April, the prepayment cost we will pay will be quite low," said a source familiar with the developments.

The finance ministry plans to work out its borrowing calendar for the first half of the next financial year after taking into account the larger redemption. The source said the higher redemptions will not be a damper for the debt markets.

The Budget Estimates have made a provision of Rs 17,821 crore in 2015-16 "for switching of securities from the outstanding stock of 2016-17". But, the rise of demand in the market for the suddenly elusive government paper has encouraged the finance ministry to be a bit bolder, early on.

Pushing some of the redemption to this month will also free up more space in the redemption calendar for next year. This gambit was not possible last year as the profile of government securities coming up for maturity in 2015-16 was tilted to later months. The biggest block of papers due for redemption was, then, in June. In 2016-17, it will be April. Every year, the finance ministry retires a pre-announced sum of papers and replaces them with new papers of either similar or longer term securities.

On the investment planned to be routed through public sector undertakings, the source said keeping them out of the books of finance ministry has lowered the aggregate level of borrowing. At the same time, "the government has promised bear the repayment and interest servicing obligations for them, except in the case of the National Highways Authority of India". This innovation in Budget 2016-17 basically offers an almost sovereign support to those papers and will reduce the cost of raising the money for public-sector enterprises.

Apart from these, the finance ministry has taken other measures to keep fiscal deficit at 3.5 per cent of the GDP (gross domestic product) in 2016-17. The source cited above described these as 'safety nets' in the receipts budget, much like the early redemption plans for government papers.

"The full extent of those safety margins has not been factored in the Budget Estimates," the source added.

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