Economy: Santa’s year-end present – borrowing shock :: Kotak Securities

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Economy
Fiscal Policy
Santa’s year-end present—borrowing shock. Speculation on additional borrowing
ended as the government announced on Friday that it would borrow Rs400 bn more on
dated securities in 4QFY12E. Further, as per the 4QFY12 T-bills calendar concurrently
released, gross T-bills issuances are pegged at Rs1,520 bn, which amounts to Rs650 bn
of net issuances in the quarter. We continue to estimate GFD/GDP at 5.7% in FY2012E.
A part of the higher borrowing in 4QFY12E is also to allow the government to carry
forward cash into FY2013E. This higher borrowing will put an upward pressure on
domestic bond yields and OMOs are likely to continue to prevent disorderly movement.
We expect the yield on the 10-year GSec to rise to 8.80% in the coming weeks with
further upside dependent upon the quantum and success of OMO auctions.
Fiscal deficit 86% of BE in April-November period; we stick to GFD/GDP at 5.7% in FY2012E
Government finances have been under tremendous pressure in FY2012E. In the April-November
period itself, the total fiscal deficit is 86% of BE as against 49% in the same period last year. This
sharp deterioration in fiscal balances is largely on account of weaker revenue collections (48% of
BE), while expenditures thus far have been on track (higher subsidy outgo yet to be reflected). Tax
collections have been moderate on account of deceleration in growth (we estimate FY2012E GDP
growth at 6.7%), higher refunds and reduction in custom duty and excise tax rates on oil and oil
products in June 2011. Further, the revenue side is under pressure as the weakness in capital
markets has also added an element of uncertainty to the Rs400 bn divestment target, though
reports suggest that the government could use alternatives (SUUTI route) to meet this target. We
expect total receipts to be lower by 5% from the BE. On the expenditure side, the subsidy bill is
expected to be more than 50% higher than the BE on account of higher international prices and
Rupee depreciation but with no change in the domestic prices of fuel and fertilizers. We expect,
total expenditure to rise by 10% over FY2011 (provisional) versus BE of 5% growth. This would
result in a fiscal deficit of Rs5,229 bn (5.7% of GDP) versus the BE of Rs4,128 bn.
Government borrowing to exceed BE by Rs929 bn on dated and Rs1,015 bn on T-bills in FY2012E
The government announced Rs400 bn of additional dated security issuances for 4QFY12E, higher
than the Rs200 bn of additional borrowing that we had estimated. This difference is primarily as
we had expected T-bills financing to be higher at Rs685 bn but it is now announced at Rs575 bn.
Accounting for the Rs528.7 bn additional borrowing announced in September 2011, the total
dated security issuances exceed the BE by Rs929 bn. On the T-bill side, the government will issue
Rs1,520 bn in 4QFY12E, up from the Rs1,040 bn in 3QFY12. Taking into account the T-bill
redemptions, net borrowing via T-bill amounts to Rs650 bn in 4QFY12E versus Rs(-)150bn in
3QFY12. Interesting to note, even as the net T-bill issuances in FY2012E are at Rs1,165 bn, this
entire amount will not be used to finance the FY2012E fiscal deficit. The government has indicated
that part of the T-bill borrowing will be to carry forward cash into FY2013E to meet the
redemption pressure at the start of FY2013E (Rs590 bn). Thus, of the Rs1,165 bn of net T-bill
issuances in FY2012E, only Rs575 bn will be used to finance this year’s fiscal deficit (versus BE of
Rs150 bn).
G-sec yields to stay firm
Concerns over the poor condition of the fiscal along with apprehensions of higher borrowings by
the centre had already led to the 10-year benchmark yield to move higher to 8.57% from its
recent low of 8.35%. 10-year benchmark yield could head higher by the close of the FY2012E to
8.75-8.90% as the market continues its struggle to accommodate the higher borrowing program
and as FY2013BE is unlikely to provide any comfort on centre’s borrowings.