Archive for January 3rd, 2012

How Government is financing its deficit using short-term debt…

January 3, 2012

Update 2: There were more errors. The first version math was correct. So again made the changes. Mainly in 91 Day T-Bill category

Update 1: There was an error in the earlier post in 91 day T-Bill calculation. Subscribers may have got the wrong post earlier. Apologiess for the same.  Have corrected the same. Going by fiscal maths, there could be much more.

Each year we have some new strategy used by Indian government to show either these three or combination of them- higher revenues/ lower expenditure/ lower deficit.

As this blog (and repeated reports) has pointed in many places, state of public finances has been dismal in 2011-12. Part of the problem was a combination of overestimating revenues and underestimation of expenditure mainly subsidies. This has led to some innovative proposals to bridge the deficit (update on SUUTI plan: It is on target as govt in finalizing a note to wind it down).

Well, there were 2 developments lately.

  1. Govt increased the market borrowing further by Rs 40,o00 Cr for Jan-Mar quarter. In Sep-11, it had announced to raise Rs 52,800 Cr extra via market borrowing as small savings as a source for meeting deficit declined. Full report here
  2. Net T-Bills (which are shorter securities) issuance in Jun-Mar to rise by close to Rs 1,00,000 Cr as well.

Before I discuss details, some basics.

Government finances its fiscal deficits via three broad means:

BE 2011-12 Actuals Apr- Nov % of BE

1

External Financing Loans from ADB, IDA, World Bank etc and from Foreign Governments mainly Japan)

14500

6483.2

45%

2

Domestic Financing

398316.6

346886

87%

Some major items in this are:
   Market Borrowings

358000

342649

96%

     Long Term Bonds

343000

     T-Bills

15000

       91 Day

473.16

      182 day

4398.59

      364 day

10128.25

   Securities against Small Savings Explained in the paper

24182.46

-750.39

-3%

3

Cash Balance

20000

1932.61

10%

4

Total Deficit

412816.6

353369.5

86%

Now let us try and understand what is going on in 2011-12. First long term bonds:

  • As there was a shortfall in small savings, in Sep-11 Govt announced a extra market borrowing of Rs. 52800 Cr via long term bonds. The Market Borrowings via long term bonds thus became: 343000+52800 = 3,95,800 Cr
  •  Now as slippages continue, another 40,000 Cr has been announced. Now Borrowing via long term bonds increases to 435,800 Cr.
  • Important to note that govt said in the first instance there was no impact on fiscal deficit as sources were swapped. Now, there is a rise of Rs 40,000 Cr in fiscal deficit.Based on budget’s nominal GDP figure, this fiscal deficit now comes at around 5%

As markets usually look at Bonds, T-Bills is forgotten. The real story is here. What govt has been doing is increasing issuance sharply in T-Bills.

When T-Bills mature, what usually happens is government usually matches the new issuance with maturity. In some circumstances, it may choose to issue T-Bills lower or higher than the matured amount. Lower is when it wants to retire short-term debt and higher when it chooses to raise more short term debt. So say a 91 Day T-Bill is issued on 1-Apr-11 worth Rs. 5000 Cr. It matures on 1-Jul-11. Govt can choose to issue a new T-Bill for either 5k, lower or higher than 5k.  So you have a case of T-Bills either getting rolled over (matching the maturity) or differing than maturity.

In 2011-12 the story so far is:

91 Day

Issue

Rollover/Maturity

Net Addition/Decline

Q1

90000

63000

27000

Q2

91000

90000

1000

Q3

52000

91000

-39000

Q4

100000

52000

48000

333000

296000

37000

182 Day
H1

37950

23,000

14950

Q3

24000

17000

7000

Q4

28000

20950

7050

89950

60950

29000

364 Day
Apr-Dec

66000

28000

38000

Jan-Mar

24000

14000

10000

90000

42000

48000

Grand Total

512950

 398950

114000

So, if you see, we have an extra issuance of Rs. 114000 Cr for the year via the T-Bill route.  And this was budgeted at just Rs 15,000 Cr! This is nearly a 8 times rise from the budgeted estimate.

Based on this, fiscal deficit stands at 518817 Cr and is 6.3% of GDP based on  Nominal GDP given in the budget. Nominal GDP will be higher, on higher  inflation not growth front. NGDP expected to grow by 14%(8.5% growth + 5.5% inflation), where as it will grow by around 16% (7% g + 9% i). So should be around 6.2%. It will be interesting to see how government reports these figures. May be a new rule will say 91 and 182 not to be included in deficits..

Another things is government issues cash management bills which are of shorter duration than T-Bills say 58 days or so. They were budgeted at 20,000 Cr but final issuance was 97,000 Cr. All of them have matured and thank god there was no rolling there. So if we include CMBs as well, short term fisc management has been dire as well.

And the things don’t end here. All these extra issuances have an interest cost. Interest Payments for 2011-12 were budgeted at 2,67,986.17 Cr. Till Nov-11 this figure was 1,65,910 Cr which is 62% of BE. With 4 months remaining, this figure likely to shoot as well. Moreover, they will remain high as these high  maturities come next year. So will they be rolled over? For instance, 90,000 Cr of 364 day will come next year which is very high.

This points to  following issues:

  • Should short-term debt be allowed to rise this much even for an year? Ideally there should be some limit on net issuances of T-Bills as well.  There should be some explanation of why such a rise in T-Bills..
  • The government seems to be managing its liabilities using more of short-term debt. So far this has been happening via long term debt. But an extra borrowing program via long term debt of something like 1 lakh crore would have spooked markets. But then should not the markets be looking at this short-term financing of perhaps longer term liabilities.

Another problem is lack of clarity. Govt said extra borrowing in Jan-Mar via long term debt will be Rs 40,000 Cr. Now, when you compare the two calendars old and new, you get an extra amount of Rs 29,000 Cr. Where is the rest 11,000? The thing was govt had cancelled a security auction (7.99% GS 2017) worth Rs 4,000 Cr on 11-Nov-11. And then it announced an unscheduled auction worth rs 15,000 Cr on 30-Dec-11. BY unscheduled I mean it was not in the auction calendar for Oct-Dec 11 quarter. So, the net amount is 11,000 Cr. This was added to 29,000 to make it 40,000 Cr.And there was just no explanation of this in the press release. More clarity would have helped.

Overall, interesting times for India’s fisc management. Amazing minds seem to be at work..

Just wanted to add something more. There are two kinds of auctions competitive and non-competitive. Detailed difference is here. In bond auctions, notified amount of auction = comp + non comp bids. In T-bills, notified < comp+non comp as non-comp could be much higher. In other words,  notified amount is only for comp players. Overall raisings could be higher.

So, the final raise in T-Bills so far (Apr-Dec) are:

Comp

Non Comp

Total

91 Day

233000

89193

322193

182 day

61950

3651

65601

364 Day

65742

656

66398

Total

360692

93501

454193

Non-Comp is 25% of notified. Once we put all these figures, I am not sure where the numbers will go and how will they look….


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