Centre mulling Rs 1 lakh crore borrowing to offset fuel tax cut

The Centre will probably borrow the entire 1 lakh crore ($12.9 billion) that it will forgo as revenues due to a cut in petrol and diesel levies, according to people familiar with the matter.

Higher collections from the goods and services tax as well as personal income taxes will be neutralised by additional spending on food and fertiliser subsidies that the government is giving to the poor and farmers, said the people, who declined to be identified as the discussions are private.

The loss to the exchequer due to the recent excise duty cuts will therefore have to be borne through additional market borrowings, the people said. Calls made to a finance ministry spokesman were unanswered outside of business hours in New Delhi.

The mounting debt load will probably spook India’s bond market, where yields on benchmark 10-year notes have surged over the past month. The Reserve Bank of India, which is already managing a record borrowing plan, surprised investors with an off-cycle increase in interest rates this month.

Record borrowing

Over the weekend, the Centre cut levies on pump prices of petrol and diesel, waived import tax on coking coal and increased payouts on fertilizers as well as cooking gas for the poor. It lowered excise duty on diesel by 6 rupees ($0.077) a liter and petrol by 8 rupees, according to a tweet from Finance Minister Nirmala Sitharaman.

The revenue loss comes at a time when investors are staring at a record borrowing program from the government, surging price pressures as reflected in the wholesale and consumer price index, and the prospect of sharp interest rate increases by the central bank.

The government aims to raise about Rs 14.3 lakh crore through debt issuances in this financial year through March 2023. The entire borrowings are in local currency, with banks and insurance companies the biggest buyers of sovereign debt.

Analysts like Barclays Plc’s Chief India Economist Rahul Bajoria are raising their budget deficit estimates. Bajoria expects India’s budget gap to be at 6.9% for fiscal year 2022-23, up from New Delhi’s forecast of 6.4% of gross domestic product.