Budget, govt borrowing, and RBI

The Centre's higher gross borrowing won't be a challenge in FY27, but the increasing size of state development loans is a concern

- TAMAL BANDYOPADHYAY

Finance Minister Nirmala Sitharaman will present the Union Budget on February 1— the ninth consecutive Budget by any finance minister. It will be on a Sunday, and at a new address — Kartavya Bhavan at the Central Vista complex, New Delhi.

Beyond thetrivia, this Budget will usher ina new era —the anchor for fiscal consolidation will shift from deficit-to-GDP (gross domestic product) to debt-to-GDP ratio. There is amedium-term glide path for debt-to-GDP ratio, from 56.1 percent in the financial year (FY) 2026 to 50 per cent plus/minus 1 per cent by FY31.

Indeed, there is a shortfall in tax revenues, but most analysts expect the government to meet the 4.4 per cent fiscal deficit target for the current fiscal year, riding on liberal dividend payments by public sector undertakings as well as the central bank.

The fiscal deficit target will definitely be lower in FY27— it could be 4.2-4.3 per cent of GDP. Ifthe target is 4.3 per cent, then the central government’ debt-to-GDP ratio will drop to 55 percent, from the current level of 56.1 per cent. Ifthe government decides to cut expenditure ‘onsocial and income-support schemes, the target could be 4.2 per cent. This will bring down the debt-to-GDP ratio to below 54 percent.

The banking sector will keenly watch the size of the government's annual borrowing programme. If this year’s borrowing programme is any indication, then the Reserve Bank of India (RBI) will have tolendahelpinghand.

The central government's gross borrowing could be €16.5 trillion, at least, in FY27. Net of redemptions, the net borrowing will be much lower. But the state governments’ borrowing — the state development loan, or SDL — queers the pitch. It could be around %13 trillion.