Drought stretches budget; more borrowing unlikely
A poor monsoon threatens to worsen India`s already steep fiscal deficit as it spends on food imports and relief for farmers.
Mumbai: A poor monsoon threatens to worsen India`s already steep fiscal deficit as it spends on food imports and relief for farmers, although the government is seen tapping the bond market only as a last resort to fund any further shortfall.
With investors already forced to absorb a record 4.51 trillion rupees (USD 93 billion) billion in borrowing this year, New Delhi is expected to look elsewhere for funds to plug the growing budget gap, including the sale of third-generation mobile spectrum and stakes in state companies.
The government could also cut spending.
"Probably they need to borrow more but there is no appetite. So it is kind of a deadlock situation," said J. Moses Harding, head of the global markets group at IndusInd Bank in Mumbai.
Drought relief could push up India`s fiscal deficit by as much as USD 4 billion, or 0.5 percentage points, economists say. Already, the government expects a fiscal deficit of 6.8 percent of GDP for the year ending in March -- its highest in 16 years.
Worries about looming inflation have curbed demand for longer-dated bonds, forcing the government this month to unveil a shorter-term notes programme to manage liquidity.
"It is very clear the demand side market is saturated," said Arvind Sampath, head of interest rates trading at Standard Chartered in Mumbai.
"They will find other sources such as 3G to finance those but not stretch the bond market anymore," he said.
Including state-level shortfalls, India`s total fiscal deficit may hit double-digits as a percentage of GDP this year.
On Thursday, the central government gave states permission to borrow an additional USD 4.3 billion in the current year.
Rainfall was 26 percent below normal in the June-September monsoon season through Aug. 19, threatening crops including rice and sugar and sending food prices higher, even as overall inflation remains muted given last year`s high base effect on record oil prices.
Food subsidies, meanwhile, are rising. Farm Minister Sharad Pawar said they would top 600 billion rupees (USD 12.3 billion) this year, about 15 percent higher than was estimated last month.
In 2002/03, the last major drought year, the federal government`s fiscal deficit came in at 5.9 percent of GDP, higher than the budget estimate of 5.3 percent. Agriculture`s share of the overall economy, however, has decreased to about 17 percent from 21 percent during the last bad drought year.