Short-lived relief for bond markets

BL Research Bureau

The Change

The Budget relaxing the target for the fiscal deficit to 3.8 per cent (from 3.3 per cent) for FY20 was almost a given. The Centre taking cover under the provisions of the FRBM Act, and allowing itself leeway on the fiscal front, in the next fiscal, was also on the cards. The fiscal deficit target for FY21 has been fixed at 3.5 per cent.

Given that the bond market had already factored in some slippage, bond yields have not moved up much. But there is more than meets the eye on the fiscal front. The relief for bond markets, could be short-lived.

The background

Taking stock of the shortfall in revenues so far, the Centre has revised the revenue projection for FY20 from the previous Budget. For instance, it has lowered tax revenues (net) by 8.7 per cent from the budgeted number. But this still assumes a 14 per cent growth from FY19, which, given the performance so far looks difficult. Income tax has grown by a modest 5.1 per cent till date.

But what is more perplexing is that despite the weak disinvestment proceeds so far (₹18,000 crore), the Centre has retained ₹65,000 crore target for FY20. This would be a tough task to achieve. The spectrum proceeds are another weak link. After assuming ₹50,500 crore of spectrum proceeds for FY20 — which was difficult right from the start — the Budget has revised it upwards to ₹58,900 crore for FY20.

The revenue and expenditure assumption for FY21 are also dodgy. The Centre has pegged 14 per cent growth in income tax collections for FY21, which looks optimistic. How the various tax cuts announced, sans the exemptions, impact the overall tax collections needs to be seen. It appears that the Centre’s entire hope is pinned on the disinvestment proceeds. While attaining the ₹65,000 crore target in FY20 itself looks tough, the Centre has pegged a whopping ₹2.1 lakh crore for FY21. Of this ₹90,000 crore alone will be from disinvestment of government stake in PSU banks and financial institutions (LIC). But fetching the right value and kindling investor interest will be critical.

Above all, the 10 per cent nominal GDP growth assumption for FY21, could be a big dampener to achieve 3.5 per cent fiscal deficit target.

The verdict

The fiscal deficit ratio is a very narrow way of looking at fisc. The biggest issue, however, is to make sense of the gross market borrowings figure. In the previous Budget, the Centre’ gross borrowings for FY20 were pegged at ₹7.1 lakh crore. This has been retained at the same level in the revised estimates, by dipping into small savings fund. The gross borrowings for FY21 are pegged at a comfortable ₹7.8 lakh crore.

While this has warded off a sharp rise in yield in the bond market for now, it has to be remembered that financing through small savings comes at a high cost. Also, with fiscal deficit likely to slip further, the relief in the bond market may only be short-lived.

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