Govt Borrowing cut by 70000 cr ……it should lead to lower interest rates right?? No not at all read on
even though 95% fiscal deficit is achieved in apr-aug period. As Satyakam writes … Todays H2 govt borrowing program looks like it has achieved the impossible. Finance minister made following statement on the same day the govt borrowing program was cut (how do you reconcile these two headlines)
Second ,disinvestment target is 80000 cr against current achievement of 9000 cr. Third, expenditure on account of MSP ( 10-15000 cr additional) , Ayushman Bharat ( 10-15000 cr excess), govt subsidy for LPG and Kerosene ( 15-20000 cr) are additional expected outflows. Even then govt can see what we can’t see. Cutting buybacks of Govt security will only make matters worse in 2021-22 where current outstanding is heavy.
We are going back to old ways of pushing the liabilities into the future. Govt will resort to IOU, and this deficit will be funded by leveraging PSU balance sheet and delaying payment to nodal agencies. This will lead to artificial increase in short term credit demand exactly at the time when credit cycle has got stretched because of ILFS fiasco and NBFC funding mismatch.
The deposit creation in banking system is running at 8% YOY and credit demand is around 13%. This additional working capital demand will further widen the gap between deposits and credit, crowding out genuine borrowers.