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Likely fall in govt borrowing to boost economy

India's government borrowing, a key factor in influencing interest rates, is likely to be lower in the next financial year due to prudent expenditure management and more aggressive privatisation, analysts say.

This will not only cheer bond traders, burdened by excess supply this year, but also create the right environment for lower interest rates that could stimulate economic growth, they said.

"I expect the gross borrowing programme to be around Rs 1.15 trillion for 2001-2002 and the net borrowing plan will be around Rs 740 billion," said M R Madhavan, vice-president at Bank of America.

The figure will be released in the budget due to be presented to Parliament on February 28.

The government has budgeted gross borrowings of Rs 1.17 trillion and net borrowings of Rs 760 billion in the current financial year ending March 31.

The gross borrowing includes the amount raised for repaying maturing debt.

Madhavan based his lower borrowings forecast on legislation introduced in parliament which aims to reduce the government's deficit over a period and set a statutory cap on borrowings.

The gross budgeted borrowing plan for 2000-2001 compares with just Rs 110 billion in 1990-91.

Heavy central government borrowings mean the government will compete with commercial borrowers for the available funds, thereby driving up interest rates.

This usually forces corporates to postpone investments, something the flagging Indian economy can ill afford.

Privatisation, tax collections key

Analysts expect India's ambitious privatisation plan, which has so far met with poor success due to stiff political and labour opposition, to take off in the next financial year and bridge gaps in the government's finances.

India ended 1999-2000 with a fiscal deficit of 5.6 per cent of GDP and aims to rein this in to 5.1 per cent this fiscal year.

"I have a feeling that big ticket divestment will take off in 2001-2002 and the borrowing will be actually even lower than the budgeted level," said Kamal Sen, head of research at BNP Paribas.

"I expect the fiscal deficit to be 5 per cent of GDP in 2001-2002," he said.

India plans to divest stakes in state-run firms like Videsh Sanchar Nigam Ltd, Bharat Aluminium Company, Air India, Indian Airlines, Maruti and CMC Ltd next financial year.

The privatisation is likely to raise around Rs 100 billion, Sen said. The government set targets of Rs 100 billion each for 1999-2000 and 2000-2001. It missed the 1999-2000 target and is expected to miss this year's as well.

Analysts expect a shortfall in revenue collections next year caused by a slowdown in the economy will be offset by higher privatisation receipts and a broader tax base.

"The government can't raise taxes as this will lead to evasion. It has to widen the tax base if it wants revenues to build up," Sen said.

He expected the economy to revive next year helped by a growth-oriented budget and lower interest rates.

Signal for lower interest rates

Analysts said a lower borrowing programme will set the ground for a reduction in interest rates in March.

"Reduced supply of government securities is clearly a positive sign for bond markets," BoA said in a recent report.

Bond traders have been expecting a cut in rates by the Reserve Bank of India ever since the US Federal Reserve lowered rates in January, but senior central bank officials have said there were many things to consider before a rate cut took place.

These include the central government borrowing target and the level of fiscal deficit the government will announce in the ensuing budget. Other factors included high interest rates on some government-administered savings schemes.

Last week, the prime minister's economic advisory council, which includes RBI Governor Bimal Jalan, recommended the lowering of interest rates on these schemes.

Banks use these rates as a benchmark to price their long-term deposit rates.

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