The government has already mopped up more than 90 per cent of its Rs 5.7-lakh crore targeted market borrowing (gross) for the current financial year. However, the pace of its spending has been slow, leading to a build-up of cash balances with the Reserve Bank of India (RBI).
“We have seen a build up of cash balances in December. But they eased somewhat in early January, before becoming tight again. Although the government is expected to spend the amount it has raised, the pace of spending was not even,” said a senior banker with a private sector bank.
Although the government does not release its cash balance figures, market estimates put it at Rs 90,000-1 lakh crore. Such a high cash balance with the government has put pressure on liquidity, which was evident from banks borrowing around Rs 1 lakh crore from RBI in January.
In the first two days of this week, liquidity situation has somewhat eased, with banks borrowing an average of Rs 65,000 crore from the repo window of RBI.
The central bank aims to maintain the liquidity deficit in the system to the tune of +/1 per cent of banks’ net demand and time liabilities, which is around Rs 65,000 crore.
According to market players, the government’s commitment to stick to the fiscal deficit target and control planned expenditure is the reason behind the slow pace of spending.
“There is a lot of pressure on the government to stick to its fiscal deficit target of 5.3 per cent. The government is cutting down planned expenditure by over 25 per cent,” said Patankar, senior vice-president at STCI Primary Dealer.
Patnakar added that the government was holding back spending and not making fresh incremental allocation from the ministry. For the nine-month period, all ministries have been asked to submit a funds utilisation certificate. “If earlier funds are not utilised, they are not getting fresh allocations. These factors will help to curb the fiscal deficit,” Patankar added.
RBI noted that even though there was a moderation in total expenditure, non-plan expenditure continued to exert pressure.
During the April-November 2012 period, the government’s total expenditure was lower at 58.2 per cent of Budget estimates, compared to 60.5 per cent during the corresponding period of the previous year. According to RBI, the dip in expenditure has been more visible since September 2012, reflecting the government’s efforts to rein in spend.
This comes on the back of sluggish revenue collections, which stood at 47.6 per cent of Budget estimates (April-November), compared with 49.7 per cent in the previous year. While growth in corporate tax and excise duty collection remained modest, customs duty collection was adversely affected, reflecting deceleration in exports.
Market participants said government spending would increase in March as it will start paying subsidies for oil, fertiliser and food, among others.
The slow pace of government spending has led to short-term rates hovering around 9 per cent. According to treasury officials, rates may further harden in March due to rollover of three month certificate of deposits.