What is government borrowing?

Topics Covered: Government Budgeting.

What is government borrowing?

Why in News?

The Finance Ministry has said that the government will borrow Rs 4.34 lakh crore in the second half of the current fiscal to meet its expenditure requirement amid COVID-19 crisis afflicting the country”s economy.

With this, the government will stick to the revised borrowing target for the current fiscal.

What was the target?

The Centre had revised the borrowing target to Rs 12 lakh crore in May against Rs 7.8 lakh crore approved in the Budget 2020-21.

What is the fiscal deficit target?

The Budget has pegged fiscal deficit at 3.5 per cent for the current fiscal, down from 3.8 per cent of the GDP in the last financial year.

Last fiscal, the government had to resort to the “escape clause” in the Fiscal Responsibility and Budget Management (FRBM) Act for deviating from fiscal deficit target to 3.8 per cent from the Budget estimate of 3.3 per cent for 2019-20.

What is an escape clause?

The “escape clause” allows the government to breach its fiscal deficit target by 0.5 percentage points at times of severe stress in the economy, including periods of structural change and those when growth falls sharply.

What is government borrowing?

Borrowing is a loan taken by the government and falls under capital receipts in the Budget document.

Usually, Government borrows through issue of government securities called G-secs and Treasury Bills.

How does increased government borrowing affect govt finances?

Bulk of government’s fiscal deficit comes from its interest obligation on past debt.

If the government resorts to larger borrowings, more than what it has projected, then its interest costs also go up risking higher fiscal deficit. That hurts government’s finances.
Larger borrowing programme means that the public debt will go up and especially at a time when the GDP growth is subdues, it will lead to a higher debt-to-GDP ratio.