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The Change
When the Centre announced the fiscal deficit number of 3.4 per cent for FY19 as against its budgeted 3.3 per cent, bond markets chose to forgive the slight miss. Even as the Finance Minister threw up a 3.4 per cent estimated figure for FY20, markets did not cringe.
But there is more than meets the eye. The whopping 24 per cent jump in gross market borrowings to ₹ 7.1 lakh crore in FY20, is a cause for worry. After the initial clam, bond markets reacted adversely, with the 10-year G-Sec yield moving up by 10 basis points.
The background
The Centre pegging its receipts at more or less its budgeted figure for FY19, should be taken with a pinch of salt.
Dividends from public sector enterprises, the RBI, PSU banks and financial institutions constitute a chunk of the Centre’s non-tax revenues.
The sharp increase in surplus from the RBI (from a ₹30,659-crore surplus last year to ₹50,000 crore this year) was expected to boost overall receipts under non-tax revenues. However the ₹20,000-crore jump from the budgeted numbers, suggest that there is an interim dividend factored in for FY19.
But the bigger question is on the disinvestment proceeds which has been retained at the originally budgeted ₹80,000 crore for FY19. As on January 29, figures put out by Dipam (Department of Investment and Public Asset Management), suggest disinvestment proceeds of just ₹35,500 crore so far.
How far the Centre’s last ditch efforts pay off needs to be seen.
For FY20, the Centre has assumed a 15-per-cent growth in direct taxes, and a 12.8-per-cent growth in indirect taxes which looks reasonable. But on the non-tax front, ₹82,900 crore by way of dividends, ₹41,000 crore from spectrum, and another whopping ₹90,000 crore from disinvestments appears a tall task.
On the expenditure front, capital expenditure, expected to increase by a measly 6 per cent, is a cause for concern.
The Verdict
By factoring in a modest expenditure target and a huge jump in non-tax revenues, the Centre has kept very little wiggle room for slippage in FY20. The joker in the pack still is underlying growth, which could upset the fiscal deficit target. The Centre has assumed a higher 11.5-per-cent growth in nominal GDP for FY20, which looks ambitious.
For FY19, the Centre had pegged in a gross borrowing of about ₹6.05 lakh crore and lowered it subsequently by ₹70,000 crore. But it has now moved up the needle by about ₹40,000 crore for FY19. What is even more concerning is the alarmingly high gross market borrowings for FY20 which is a whopping ₹7.1 lakh crore.
Investors need to brace themselves for volatility in bond markets and avoid longer duration gilt funds. For optimists expecting rate cut by the RBI, the Centre’s fiscal profligacy may play spoilsport.
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