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Is There a Rs. 30,000 cr. Debt Swap Planned For March?


Something seems off in the Budget Calculations.

Every year we spend more than we earn. We borrow the difference, typically as market debt called Government Securities. The difference between spending and earning is the “fiscal deficit“.

We’ve borrowed in past years, and some of that borrowing comes up for redemption at maturity. So if your deficit is Rs. 1000, and then you have some Rs. 200 worth of debt coming up for redemption, then you need to borrow Rs. 1200 – 1000 to pay for the deficit, and Rs. 200 to pay back all that debt that came due.

In the government budget note here’s the part where they mention this stuff:


That means next year, we have to pay back Rs. 143,594 crores, and the “net” borrowing would be 456,405 cr. The “gross” borrowing is therefore 600,000 cr.

Basically in order to make up the deficit, which in this budget is Rs. 555,000 cr. , you have some other smaller things like PF and other state level borrowing, and then you have market loans of Rs. 456,000 cr.

But there’s something wrong: What is currently outstanding in the next year is actually Rs. 30,000 cr. higher. We can see from RBI documents that the total outstanding is Rs. 175,000 cr. as of Feb 24, 2015:


But we plan to repay only 143,000 cr which is about Rs. 30000 cr. lesser. How can we repay lesser than what is maturing? Answer: We buy it back right now (in FY 2015) so it doesn’t appear in the accounts for FY 2016.

The only way this can happen is a debt swap. RBI did this last year, buying back debt worth Rs. 31,000 cr. maturing in immediately coming years, to 2043. The government, through the RBI buys back some bonds maturing soon, and replaces them with bonds maturing in 2043 or more.

This year too, there seems to be a plan for the exact amount:


In a way this is just financial jugglery.

The government would have had to borrow 1.7 lakh crores next year for repayment. So they’ll borrow it this year instead and move the debt over to a longer term. That means they don’t have to borrow in the market; they find some players (oh there’s always LIC) who has securities that mature soon, and they give them stuff that matures 30 years later instead.

Doing this once is fine. But if it becomes an every-year thing, you suddenly realize there is potentially a big problem every year! Look, carefully at the size of borrowings in FY 2017 (which starts from April 2016):


Next year, more than 2.23 lakh crore will mature, which means our budget constraints will increase even more; we have to borrow more and more each year. Currently there is a huge appetite for government bonds, largely because rates in Europe are negative and so on. This will not always be the case, and we’ll need a different strategy next year.

Note: To many this is just an esoteric thing happening inside the market but it does impact the outlook for yields and the behaviour of bond market players.

UPDATE: Scratch this. We found a government document detailing this very thing – and yes, indeed, a debt switch *is* planned for March. (Read this document)


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