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Informist, Wednesday, Jul 24, 2024

 

--Econ secy: May cut mkt borrow later in yr if NSSF inflow high 
--Econ secy: Aim to keep NSSF rates on par with bk deposit rates 
--Econ secy on NSSF rates: Govt not competing against banking sector 
--Econ secy: RBI, IFSCA setting up system for green bonds trade 
--Econ secy: To fund ongoing green projects via regular debt 
--Econ secy: Premium on green bond in May not significant 
--Econ secy: See no change in mkt borrowing at this point 
--Econ secy: Cutting T-bill borrowing more of a cash mgmt tool 
--Econ secy: Buying back debt using cash surplus not ideal strategy 
--Econ secy: Interest-to-GDP ratio a key parameter for govt now 
--Econ secy: High interest cost a concern for govt 
--Econ secy: May have aim for debt-to-GDP level in a year's time 
--Econ secy: Want debt to be sustainable to allow buffer for exigencies 
--Econ secy: Aim for sustainable debt instead of hard debt-to-GDP target 
--CONTEXT: Econ secy Ajay Seth's comments in interview to Informist 
--Econ secy: There is a new approach for managing govt debt  

 

By Krity Ambey and Sagar Sen

 

NEW DELHI - Finally breaking the silence on the government’s plans to bring down debt levels, Economic Affairs Secretary Ajay Seth today said that the Centre’s approach to debt is undergoing an overhaul. Instead of targeting a specific debt-to-GDP ratio, the government is now aiming for debt sustainability and creation of a buffer to borrow more in case of exigencies, Seth said.

 

"(Under) the new approach, instead of looking at a hard number, we are looking at the stock of the debt," Seth told Informist in an interview. "So we want debt sustainability as well as a heavy enough buffer to take care of any exigencies in the economy." 

 

If the debt-to-GDP ratio is high, the ability to raise more debt is limited, Seth said. "But if the total stock of debt is lower, then if the need arises, we can borrow more."

 

Several advanced economies have such high debt levels that they don't have the capacity to borrow more even if there is a need, Seth said. "We don't want that (for the Indian economy)."

 

The Fifteenth Finance Commission had suggested the Centre to maintain a debt-to-GDP ratio of 40%. However, the target became a relic of the past in the aftermath of the COVID-19 pandemic as the Centre's fiscal deficit swelled up, along with its debt levels. Although the government adopted a new fiscal glide path that calls for reducing fiscal deficit to 4.5% of GDP by 2025-26 (Apr-Mar), it has not announced a fresh target for debt-to-GDP ratio.

 

The government is yet to set a target for the debt-to-GDP ratio which will be suitable as per the new strategy to manage debt level. "But maybe in a year's time, we can have an aspirational target," Seth said.  

 

India's fiscal metrics, especially the debt-to-GDP ratio, are seen as a key impediment to its rating upgrade. India's debt-to-GDP ratio is currently close to 80%, higher than similarly rated peers, rating agencies have said.

 

High debt also brings a heavy interest burden on the government. The government wants to lower the debt level to bring down the interest payment, Seth said. The interest payment-to-GDP ratio is a key parameter for the government now, along with others like tax-to-GDP ratio, Seth added.

 

In the full Budget for 2024-25, the government has lowered the estimate for interest payment to 11.63 trln rupees from 11.90 trln rupees projected in the Interim Budget. With a nominal GDP growth of 10.5%, as assumed in the Budget, the interest payment-to-GDP ratio for the current fiscal is likely to be 3.56% against 3.60% in 2023-24. 

 

The downward revision in interest cost in the full Budget from the interim one has been on account of negative net borrowing from T-bills.  The government has significantly cut its net short-term borrowing to (-)500 bln rupees from 500 bln rupees in the Interim Budget. This means the government will net redeem T-bills this year using its cash pile. 

 

BORROW PLANS

The cut in borrowing from T-bills is a cash management exercise, Seth said. "We are holding on more cash, so to that extent we are borrowing less from T-bills."

 

This year the government also deployed some of its cash surplus to buy back dated securities set to mature in the current fiscal. "We started the year with a higher cash balance, more than we had anticipated," Seth said. The government bought back securities worth 302.48 bln rupees this year.

 

But going ahead, the government would not like to buy back gilts to lower debt for later years. "Buyback is possible only if there is surplus money," Seth said. "High cash balance does not happen every year. That (buyback) cannot be a debt repayment strategy." 

 

As of now, the government does not expect any change in the current year's net borrowing through dated securities, Seth said adding that the final call will be taken in September before releasing the borrowing calendar for Oct-Mar. The government is set to borrow 11.63 trln rupees on net basis this year. 

 

However, going ahead in the year, if the government notices higher than estimated inflow into small savings schemes, the government may consider cutting the market borrowing and borrow more from small savings. The government is likely to fund 26% of its fiscal deficit by borrowing 4.20 trln rupees from small savings, as per the Budget. This is 461 bln rupees lower than projected in the Interim Budget in February. Meanwhile, the government has also cut the estimate of collections from small savings to 3.88 trln rupees for this year in the full Budget from 4.24 trln rupees in the Interim Budget.

 

Seth said the government has seen the collection trend for the small savings scheme so far in the current fiscal and extrapolated that for the final estimates. Collections in certain schemes have been robust due to the investment norm changes that were announced in the 2023-24 Budget. However, he also said that the government is not looking to compete with the banking sector to attract more inflows into small savings.

 

In June, the government kept interest rates on all small-savings schemes unchanged for Jul-Sep period. While the rate of interest on one-year deposit was kept at 6.9%, interest rate on five-year deposit was at 7.5%. Sukanya Samriddhi account scheme earns an interest rate of 8.2% and Senior citizen savings scheme interest rate was at 8.2%. However, the weighted average domestic term deposit rates on fresh rupee term deposits of scheduled commercial banks was at 6.47% in May. 

 

"The aim is to keep it (NSSF rates) at par with what the banking sector interest rates are," Seth said.

 

GREEN GLOOM

On tepid response from investors on government's recent green bond offerings, Seth said that the instrument was introduced because there was a set of investors that was in a position to offer finer rate if the investments were utilised for a particular cause. However, if there is no such investor class then the rationale doesn't hold, he said.

 

On May 31, RBI rejected all bids at the auction of a new sovereign green bond worth 60 bln rupees, possibly due to lack of a greenium. The next such auction is scheduled in August. "In the month of May, the differential was not significant. We'll see what investor interest is there in the future," Seth said.

 

Seth said globally the premium on green bonds, popularly known as greenium, has been of the order of about anywhere from four to eight basis points. "It has not been significant."

 

The cancellation in May will, however, not impact the ongoing green project funds. "That will be out of general borrowing then because even the green bonds are a sub-set of the government's gross borrowing," he said.

 

Seth also said trading of sovereign green bonds is likely to start in International Financial Services Centre at the Gujarat International Finance Tec-City in Gandhinagar soon.

 

"The modalities are being worked out. The latest discussions (between RBI and International Financial Services Centres Authority) also involves putting the information technology system in place. Because the RBI, as the debt manager, has its own ledger where the debt gets recorded. There has to be an information technology system through which the two markets can connect with each other," Seth said.  End

 

Edited by Vandana Hingorani

 

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