Govt. Borrows
The Govt. of India may have more fiscal space in the second half of financial year. How?
The Govt. borrows money every year to provide for its expenses and for development expenditures. These monies are borrowed through RBI auctions (RBI borrows on behalf of the govt.).
This year the govt. has raised close to Rs.7.4 lake crores which is over 60% of its revised borrowing target of 12 lakh crores.
Spenders turn Savers
Due to the Wuhan Corona Virus slowdown, most people have slowed down on their spendings. Spendings have also slowed down/reduced due to "work from home". As people spend less, they save more.
As people save more, banks are flush with fixed deposits. That is why deposit growth of banks is strong. There is money also getting invested in Mutual Funds and Stock Markets.
Banks however are not lending to businesses.
Apart from this there is money flowing from abroad (FPI = Foreign Portfolio Investors) into the Indian equity markets.
This is perhaps the reason why there are a lot of new IPOs (Initial Public Offerings) these days in the Indian Stock Markets.
So where will this surplus money which the banks have go?
Most likely this money will be borrowed by the Govt. However if the Govt. borrows more its debt will increase.
Govt. Debt and Interest Burden
The Debt of Indian Govt. has progressively increased over the years.
However as the interest rates decrease the burden of interest in the Govt. may not increase significantly.
Estimates have gone awry across the globe amid higher pandemic-related expenditures.
Economists believe that the Debt/GDP of India will go between 85% to 90% for the Financial Year 2020-21.
However if India can grow over 7% in the next five years, then all this additional borrowing by the Govt. will be taken care of. A higher growth means higher tax revenues and hence the govt can then pay debt with ease.
If the growth does not pick up then this will be difficult. Govt. will have to borrow more to repay older debt. That may mean increase in interest rates etc.
Where does Govt. Spend?
Apart from expenditure for the functioning of the govt. (salaries etc.) the govt can spend on social welfare schemes (where the possibility of it reaching the poor are less).
It can alternatively spend the monies on building infrastructure (education, roads, ports etc.) and improve the productivity of the economy. So far it is this method that seems to have worked better.
(Disclaimer : This blog is for information purposes only. It is not to solicit any business or provide any kind of advise)
