How Rs 25,000 crore of Sahara money transfer to government can affect the economy & bond market

Following the death of Sahara Group founder Subrata Roy last week, the government is exploring the legality of transferring the unclaimed funds lying in the Sahara-Sebi Refund Account to the Consolidated Fund of India, ET reported this week. As on March 31, the funds recovered from the Sahara Group and deposited in state-owned banks amounted to Rs 25,163 crore after pay outs to some claimants. With officials saying that the dedicated refund account under the Sebi had barely seen claimants coming forward after 11 years, here is an explainer on how a potential transfer of funds to the Centre could provide a breather for the government bond market, which has seen record supply over the past couple of years.

HOW MUCH WOULD THE SAHARA FUNDS IMPACT THE BOND MARKET?

If around Rs 25,000 crore worth of the unclaimed Sahara funds were to find their way to the government’s Consolidated Fund; assuming a corresponding decline in the quantum of money needed to be borrowed by the Centre, the impact on government bonds would not be large. According to the pattern of government borrowing for the current financial year, the Centre has issued a monthly average of bonds worth Rs 1.45 lakh crore over the past three months. In November, the government is scheduled to sell bonds worth Rs 1.29 lakh crore, with weekly sales averaging more than Rs 30,000 crore.


Also read:Sahara-Sebi refund account may be transferred to government

WHY DOES THE GOVERNMENT BORROW?

The Centre and the state governments borrow funds in order to bridge their fiscal deficits, or the shortfall between their revenues and their expenditures. Borrowing is done by issuing bonds which are purchased largely by institutional investors such as banks, mutual funds, insurance companies, foreign portfolio investors, and provident funds. There is a provision for retail investors to buy government bonds although the participation so far is subdued. According to RBI norms, Indian banks have to invest a certain portion of their deposits in government bonds as part of the Statutory Liquidity Ratio.

HOW MUCH DOES THE GOVERNMENT BORROW?

Till FY19, the central government’s gross market borrowing through bonds had never crossed the Rs 6 lakh crore mark. In the subsequent years, government borrowing surged due to the Centre’s efforts to spend more and revive slowing economic growth, particularly during the COVID crisis. From Rs 7.10 lakh crore announced in the Interim Budget for FY20, the Centre has announced a gross borrowing of Rs 15.43 lakh crore in FY24. This translates into a sharp increase in supply of government bonds.

ARE THERE CONCERNS OF MORE GOVERNMENT BORROWING?

One way in which a potential transfer of Sahara funds to the government could help the bond market would be by assuaging concerns of additional market borrowing. Over the past few years, the government has on occasion resorted to announcing extra market borrowing. The Centre has sometimes announced the same in December after taking stock of revenues. On other occasions, it has announced extra borrowing during the Budget on Feb 1. Given that 2023 is a pre-election year, some concerns do exist of the government stepping up spending on welfare schemes, which may need extra funding.

HOW DOES GOVERNMENT BORROWING IMPACT THE ECONOMY?

Yields on government bonds are the benchmarks used by corporations to determine the rate of interest that they must pay to investors for raising money through bonds. If government bond yields move higher, corporate entities must accordingly shell out more to garner funds through bonds, pushing up borrowing costs in the economy. Extra supply of government bonds typically leads to a rise in yields.