New Delhi: A massive increase in the borrowing by the Centre and States this year will not crowd out the space for private borrowers such as the corporate sector, SMEs and retail borrowers as there is enough money supply in the market that will easily absorb the additional borrowing by the government this year, two economists told ETV Bharat.
Initial estimates that the Centre and States may borrow additional Rs 8-10 lakh crores in this fiscal to meet a steep decline in their revenue collection due to the Covid-19 global pandemic gave rise to fears that it may crowd out the space for the private sector.
“At this point of time the banking sector has adequate amount of liquidity with them for two reasons, one is structural liquidity, the second is credit growth and deposit growth,” said Upasna Bhardwaj, senior economist and senior vice president of Kotak Mahindra Bank.
Bhardwaj says deposit growth is in near double digits and credit growth was clearly muted, so given that kind of divergence, the banking system has enough money supply.
Covid-19 pandemic changed the borrowing dynamics
The rapid spread of Coronavirus disease not only impacted revenue collection as the business and industries were shut for three-months during the nationwide lockdown but the government was also required to spend more on the Covid-19 relief measures under the Rs 1.7 lakh crore PM Garib Kalyan package.
The scheme aims to insulate nearly two-third of the country’s population from the adverse economic impact of the Covid-19 virus by providing basic food, fuel and some disposable cash in the hands of nearly 80 crore people through November this year.
Read more: COVID-19: Suspension of crucial insolvency provisions extended by 3 months
Covid-19 dents revenue collection
While presenting her first full budget in February this year, finance minister Nirmala Sitharaman estimated the Centre’s total revenue receipts to be in excess of Rs 20 lakh crore in FY 2020-21, an increase of over 1.7 lakh crore (over 9% growth) over the revised estimate for the previous fiscal.
However, according to an agency report early this month, the Centre’s total tax collection, till September 15, declined by 22.5% to just Rs 2.53 lakh crore over the collection during the same period last year.
The steep decline in the total tax collection confirmed the thinking within the government that its revenue collection will be severely hit due to the Covid at a time when it will be required to spend more on welfare schemes and relief measures.
In May this year, the Centre revised its borrowing target from the budget estimate of Rs 7.8 lakh crore to Rs 12 lakh crore, an increase of over Rs 4 lakh crore.
The Centre also hiked the statutory borrowing limits of States under the Fiscal Responsibility and Budget Management (FRBM) Act, which allows States to borrow an additional Rs 4.26 lakh crore this year.
Thirdly, this year the Centre also expressed its inability to pay constitutionally guaranteed GST Compensation dues and instead asked States to borrow through a special window, which will be later repaid by the Centre. According to initial estimates, it may lead to an additional borrowing of Rs 1-2 lakh crore, putting more burden on the banking system.
These three factors alone may lead to an additional government borrowing of Rs 10-12 lakh crore, causing concerns in some circles that it may affect the credit flow to the private sector including retail borrowers.
No dearth of money for private borrowers
In response to a question by ETV Bharat in a discussion jointly organised by EGROW Foundation and Assocham, Upasna Bhardwaj of Kotak Mahindra Bank says that the Reserve Bank is also taking measures to ensure that there is enough liquidity in the system.
“Given that kind of environment, with muted credit requirements, you will not see crowding out in this kind of environment,” she said.
Banks have ample liquidity
Upasna Bhardwaj says despite the stress created by the Covid-19 global pandemic Indian banks have ample liquidity with them.
“If you see what the banks are holding, the actual versus what is required, the SLR security that they are investing in is nearly 29% of NDTL (net demand and time liabilities). So it is almost 10% extra that they are holding,” explained the banker.
Ashima Goyal, a member of Prime Minister’s Economic Advisory Council, says there is enough liquidity in the system that will absorb excess government borrowing this year.
“So far there is enough liquidity in the system that will accommodate government borrowing without affecting the G-Sec rates,” Ashima Goyal said in response to a question by ETV Bharat.
Talking about the excess liquidity, Upasna Bhardwaj says banks are investing this excess money into the government securities purely because of lack of other options to invest.
“So there is no crowding out at this point of time. The problem of crowding out only happens when credit demand is there at a time when there is excess borrowing by the government,” explained Upasna Bhardwaj.
Ashima Goyal, however, warns that the situation may very well change in future as the pandemic has shown no sign of abating and medical science is yet to come up with an answer to the virus.
“G-sec rates are coming down and genuine interest rates are coming down in the market but there is so much uncertainty in the current environment as to what will be the borrowing in the future,” Ashima Goyal said in a discussion organised by the shadow Monetary Policy Committee of Noida based think tank EGROW Foundation.
SARS-CoV-2 virus devastates global economy
The highly contagious virus has killed over 92,000 people in the country and nearly one million people across the globe in less than 10 months after its discovery in Wuhan region of China late last year.
According to an initial estimate by the International Monetary Fund (IMF), the SARS-CoV-2 virus is expected to cause a loss of $9 trillion to the world economy this year.
Due to the virus induced lockdown measures, India’s GDP growth contracted by nearly one fourth during the first quarter (April-June period) of this fiscal.
(Article by Krishnanand Tripathi)
