The Centre, which turned over a new a leaf in fiscal transparency in the Budget FY22 by ending its practice of off-Budget borrowings through state-run agencies, wants to pre-pay the remaining such outstanding liabilities of Rs 1.7 trillion over a reasonable period, but it can’t, as investors are unwilling to forego such high interest-bearing bonds, a senior finance ministry official told FE.
The Centre had off-Budget liabilities close to Rs 6.7 trillion by end-FY21. It brought about Rs 5 trillion or 75% of such liabilities into the balance sheet in FY21-FY22. Mainly, the government took over the Rs 4.27 trillion extra-budgetary resources (EBRs) raised by the Food Corporation of India towards food subsidy arrears during FY17-FY21 from the National Small Saving Fund (NSSF). Fertiliser subsidy arrears of another Rs 67,000 crore were also cleared by the Centre simultaneously.
“We are eager to extinguish the remaining off-Budget liabilities. But, since the bonds issued by Hudco, Nabard etc offered a higher interest rate than G-secs, the bond holders are not very keen. The investors have locked into the rate, and they don’t want us to prepay,” the official said, adding “so, we cannot break the contract.”
In the government outreach to some of these bondholders, the latter expressed the apprehension that if they get the cash now, they can’t redeploy the funds at similarly attractive coupon rates in government or similar secure and highly rated bonds.
Usually, bondholders demand a premium or encash bonds at a much higher interest rate than promised to them to recoup their loss of interest income in the residual period of the bonds, in case an issuer wants to pre-pay. “We are not ready to pay a premium to prepay these bonds,” the official, quoted above, added.
For example, the government of India (GoI) fully serviced bonds, issued by the Housing and Urban Development Corporation (Hudco) in November 2018, bears a coupon rate of 8.6% and the bonds are slated to mature in 2028. Similarly, Nabard issued GoI fully serviced 10-year bonds in February 2018 at the rate of 8.22%. These bonds continue to be attractive even after the Reserve Bank of India raised interest rates by 250 basis points in the last one year to contain inflation. The 10-year G-secs yields now hover around 7.2%, 100 basis points lower than what Nabard’s GoI serviced bonds offer.
Between FY17 and FY21, Nabard, Hudco, PFC and REC mobilised about Rs 1.7 trillion fully serviced by the Centre to fund various government programmes, including irrigation, housing, sanitation, drinking water and rural electrification, among others.
As of date, the outstanding off-Budget liabilities of the Centre include about Rs 49,000 crore for the Pradhan Mantri Awas Yojana-Rural, Rs 34,600 crore for rural electricity and other power sector schemes, Rs 33,000 crore for credit linked subsidy scheme for affordable housing, Rs 20,164 crore for various irrigation projects, Rs 20,000 crore for Pradhan Mantri Awas Yojana-Urban and Rs 12,300 crore for Swachh Baharat Mission-Rural.
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The Comptroller and Auditor General (CAG) of India and the 15th Finance Commission (previous commissions as well) had red-flagged the off-Budget funding of welfare schemes through public sector entities and had urged the Centre to come clean on these.
Due to pandemic-induced revenue slowdown as well as repayment of a major chunk of off-Budget liabilities, the Centre’s deficit in FY21 pushed its debt-to-GDP to also reach over a 15-year high of about 61.6%. It has since moderated, and is estimated to be 57.3% in FY23.