Fiscal deficit is a death sentence for Banks in India

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The Central Government Budgets are running with huge Fiscal Deficit, due to mismatch of Expenditure and Receipts. Same is the case with all State Governments.

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To raise additional funds due to Deficit, both Central and State Governments are issuing Bonds with a least and nominal interest rates for 5 years to 30 years also. These Bonds are mostly purchased by Banks, Life Insurance Companies, Assets assurance Companies, RBI and Nabard etc.

Interest rates

The interest rates on these bonds are always less than 1% or 2% of housing loan interest rate on the given date. Hence it is not a profitable investment for anyone. At present Housing loan in SBI is at 6.9% per annum recently issued Bonds are quoted at 5.9% to 6% only. Whereas the cost of the deposit is around 5% to 5.5% for many banks. Moreover, funds are blocked for a longer period. Year after Year the Fiscal Deficit is increasing for Central Government heavily and moderately for State Governments.

In 2013-14 when the total expenditure of Central Government has estimated at Rs.15,63,485 crore, Fiscal Deficit was estimated at Rs.508,149 crore, that means around 32% was borrowed by Bonds. Out of this Rs.5,08,149 crore, interest payments for existing bonds was Rs.3,77,502 crore. That means though Rs.508,149 crore raised as loans, only Rs.1,30,647 crore was available for spending by Govt. TheSame is the case with the State Governments budgets every year wherein around 60% of the funds are also being raised by bonds due to payment of interest on existing bonds.

Recently 15 years tenor bonds were issued for Rs.68,000 crore @ 5.82% p.a.by the Central Government. Similarly, 10 years of bonds were also quoted at 6.01% p.a.

Burden of COVID and Slow Down

The Fiscal Deficit of Central Government in 2017-18 was Rs.5.88 lakh crore, in 2018-19 it was Rs.5.71 lakh crore, in 2019-20 it was Rs.7.10 lakh crore. Government said that the increase in Fiscal Deficit was due to Slow Down of economy in 2019-20.

Now Covid 19 has shown it’s effect on tax collection heavily especially from March 23, 2020 to July 31, 2020, due to lockdown and restrictions on imports & exports and Transportation bottleneck .

While presenting the Central Budget for 2020-21, the Finance Minister Nirmala Seetaraman has estimated the total expenditure at Rs.30.3 lakh crore which includes Fiscal Deficit of Rs.10 lakh crore. In September it was enhanced to Rs.12 lakh crore. So an increase of Rs.4.90 lakh crore compared to last year 2019-20 of Rs.7.10 lakh crore. The interest burden further increases enormouly from next year onwards. Already it was estimated that around Rs.7 lakh crore will be used for payment of interest only.

The Fiscal Deficit (FD)is always calculated as a percentage to Gross Domestic Product ( GDP). In present financial FD was 5.8% of GDP, states are also permitted to raise 4% of their state GDP. Overall basis around 9.8% of GDP was raised as loans by both State & Central Government . It is going to be a Debt Trap for both Governments .

Actually some Cushion or Reserve to be kept for meeting any Natural Calamities or tensions at Border states or any other unforeseen difficulty.

Ethiopia & Sudan

In Ethopia and Sudan countries due to heavy debts from internal institutions and external agencies, the inflation is in 40% to 50% . Both the countries became bankrupt.That situation should not come in any state or Central Government.

Free Beeies

Most of the money raised is being used for Free Beeies and subsidies which has no logic and neither created any asset nor employment. The subsidy burden was huge mostly in Southern States and Western states.

Now time has come critically in such a way that most of the state Governments may struggle to pay Salaries and Pensions regularly from January 2021 to March 2021. Now, will have to see how the Centre will resolve this situation.

(Next: Narrow Banking)

(Author is the former retired bank manager and financial analyst)

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