NEW DELHI: The Centre is unlikely to borrow a planned Rs 15,000 crore, on net basis, through sovereign gold bonds (SGBs), in the current financial year, giving a potential 0.05% downside benefit to the fiscal deficit target of 4.94% of GDP. It may also permanently cease to use SGBs for borrowing purpose.
The move is prompted by relatively high cost of funds raised via this route.
The Centre will formally decide on the discontinuation of borrowings through SGBs in a meeting with the Reserve Bank of India officials at the end of this month, an official told FE.
In the Budget presented on July 23, the government pegged the gross SGB issuance at Rs 18,500 crore and net borrowing through the instruments at Rs 15,000 crore for FY25.
The Centre finances its fiscal deficit with several instruments including dated securities (G-secs), national small savings fund (NSSF), provident funds and other tools including sovereign gold bonds.
The Centre’s cost of borrowing through dated securities is around 7% and up to 8.2% through various NSSF schemes whereas the cost of borrowing the SGBs was around 12% for the Sovereign Gold Bond 2016-17 Series I.
In SGBs, investors received interest payments and capital appreciation. The interest rate for SGB 2016-27 Series I was 2.75% per year. The bonds were issued on August 5, 2016, for Rs 3,119/gram and were redeemed at Rs 6,938/gram, which was a 122% absolute return over eight years.
Besides lower borrowing due to the likely scrapping of SGB issues, the slower pace of spending despite buoyant revenues will likely rein the fiscal deficit below 4.94% (Rs 16.13 trillion) estimated for the current financial year.
Spending on the new or revamped schemes like Pradhan Mantri Awas Yojana-Gramin (PMAY-G) and Urban (PMAY-U), scheme for the “productization” of Indian technology and employment-linked incentives will likely materialise in the second half of 2024-25.
Similarly, the Centre would take time to disburse the interest-free capex loans linked to reforms by states. The Centre has enhanced the outlay on interest-free capex loans to Rs 1.5 trillion for FY25 from Rs 1.3 trillion in the interim budget. As much two-third of these loans or Rs 95,000 crore are linked to reforms.
Due to a slowdown in government programmes due to general elections (in April-May), the Centre’s capex fell by 17.6% in April-July of FY25. Revenue expenditure also fell by 2.3% on year in April-July 2024.
Source: The Financial Express
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