FY21 borrowing target raised by a massive 54%

By: |
Published: May 9, 2020 4:15 AM

Announcing the revised calendar, the government said all the auctions covered by the calendar will have the facility of non-competitive bidding scheme, under which 5% of the notified amount will be reserved for the specified retail investors.

Of course, the recent spike in fuel taxes could generate an extra Rs 1.4 lakh crore through the current fiscal, but even that won’t plug the revenue shortfall.Of course, the recent spike in fuel taxes could generate an extra Rs 1.4 lakh crore through the current fiscal, but even that won’t plug the revenue shortfall.

The Centre on Friday ended its silence on whether and how its short-term fiscal stance will be altered in the wake of Covid-19 crisis, by announcing a sharp 54% increase in its FY21 gross borrowing target to Rs 12 lakh crore from Rs 7.8 lakh crore planned earlier. However, the step, with the potential to inflate the borrowing costs of states and Corporate India, won’t still create room for a fiscal stimulus of the magnitude many experts have pitched for, given that the sharp economic slump will sure blast a big hole in its revenue receipts.

The revenue shortfall could be of the same order of the additional borrowing planned of Rs 4.2 lakh crore through the year, if not higher. So, what best the latest step could mean, in terms of support to the economy and the vulnerable sections, is that government spending, while being re-priortised in a significant manner, might not shrink much, in the aggregate.

Of course, the recent spike in fuel taxes could generate an extra Rs 1.4 lakh crore through the current fiscal, but even that won’t plug the revenue shortfall.

Analysts expect the benchmark 10-year bond yield, which dropped below 6% on Friday, to rise again. Bond dealers said the additional borrowing might push yields higher by 15-20 basis points when the market opens on Monday unless the RBI announces ‘some solid steps’ to finance the enlarged government deficit. Ananth Narayan, professor-finance at SPJIMR, said, “What matters to the market is whether the RBI will announce OMO purchases of dated securities to support the additional borrowing.”

There isn’t clarity yet on whether the RBI would opt for monetising a part of the Centre’s fiscal deficit by buying bonds issued by it directly in H1, although many see this happening later in the year.

According to Barclays Research, the move could give the government room not just to reduce the pressure from estimated revenue losses of around 2% of GDP, but also potentially to scale up expenditures by Rs 1.9 lakh crore (0.9% of GDP) from current levels, accounting for the fuel taxes mop-up, (extra) expenditures already announced and factored revenue losses.

FE had estimated earlier that if the Centre’s budgetary expenditure for FY21 has to be maintained at the same level as budgeted, it will have to allow a huge fiscal slippage from the budgeted 3.5% of the GDP and incur a fiscal deficit of 5% or higher. If nominal GDP size in FY21 turns out to be some 4% less than the budgeted Rs 225 lakh crore and a net tax revenue shortfall of over Rs 3 lakh crore from the budgeted level could inflate FY21 fiscal deficit to 5.3% or thereabouts, in a possible scenario where tax buoyancy is close to zero. The deficit would be higher if one assumes disinvestment receipts shortfall of Rs 1 lakh crore, and still graver if the nominal GDP growth turns out be just 4% (0% real growth has been predicted by Moody’s for FY21and Nomura predicted 0.5% contraction for 2020).

The enhanced borrowing will mean a fiscal deficit of at least 5.5% in FY21, against the budgeted 3.5%, under unchanged conditions, according to CARE Ratings.

The Centre plans to borrow as much as Rs 6 lakh crore between May 11 and September 25 in equal weekly tranches of Rs 30,000 crore, having already borrowed some amount earlier this fiscal.

Earlier, the Centre had announced that it would borrow Rs 4.88 lakh crore, or 62.6% of its budgeted full-year target (gross) of `7.8 lakh crore, in the first half of 2020-21, only marginally higher than a year earlier. It had then proposed to issue weekly securities of Rs 19,000-21,000 crore in the first half, against Rs 17,000 crore a year before. These securities will have a maturity of 2, 5, 10, 14, 30 and 40 years.

For states, which are at the forefront of the Covid-19 battle, higher borrowing costs would further strain their finances. As such, on April 7, in the first instance of the auction for state development loans (SDL) this fiscal, nine states had to issue 10-year bonds at yields between 7.80% to 8%. Investors sought a spread of 140-160 basis points above the central government bond yield of 6.4% for the same tenure. Kerala, which offered 15-year securities, would pay as much as 8.96%, the highest rate by any state. While the yields for some states have since eased, these are still too high for comfort.

While the combined fiscal deficit of states in FY20 is seen at breaching the 2.6% (of GDP) target, several states are now asking for the FRBM forbearance in FY21 to raise the deficit to even 5%.

The gravity of the imminent fiscal slippage would be better appreciated against the fact that consolidated fiscal deficit of the Centre and the states in FY19 was estimated at 5.8% — Centre 3.4% and states 2.4%. States are likely to report some slippage in FY20 and the Covid-19 crisis could exacerbate their fiscal positions in FY21. So, we may be looking at consolidated gross fiscal deficit of 8-9% in FY21, with the actual deficit (including off-Budget) even higher at near double-digit levels. Clearly, the FRBM mandate is being besmirched, but there is hardly any way out, at this juncture.

Announcing the revised calendar, the government said all the auctions covered by the calendar will have the facility of non-competitive bidding scheme, under which 5% of the notified amount will be reserved for the specified retail investors.

“Like in the past, the Reserve Bank of India, in consultation with the Government of India, will continue to have the flexibility to bring about modifications in the above calendar in terms of notified amount, issuance period, maturities, etc. and to issue different types of instruments, including instruments having non-standard maturity and Floating Rate Bonds (FRBs), including CPI-linked inflation linked bonds, depending upon the requirement of the Government of India, evolving market conditions and other relevant factors, after giving due notice to the market,” according to an official statement.

The central bank will also conduct switches of securities through auction on every third Monday of the month.

Commenting on ways to finance the fiscal deficit, chief economic advisor (CEA) Krishnamurthy V Subramanian had on Thursday told India Today channel that around $60 billion could be raised through listing government bonds on the global indices. However, this money is likely to be raised only in the second half of this fiscal and next fiscal. Nevertheless, this route will enable the government to structure the borrowing plan and finance the deficit in a way that the cost of borrowing doesn’t rise much, he said.

Aditi Nayar, principal economist at ICRA, said: “Higher borrowings are likely to push up yields, unless open market operations or other instruments are deployed by the RBI to absorb a part of the higher issuance, and crowd out borrowings by state governments and corporates.” However, less pressure on expenditure compression to offset the expected revenue shortfall, would allow economic activity to display some semblance of recovery in the latter part of this fiscal year, she added.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1PM Modi launches financing facility of Rs 1 lakh crore under Agriculture Infrastructure Fund
2PM to launch financing facility under Agriculture Infrastructure Fund at 11 am
3Signs of recovery? Export contraction just 5% in August: Piyush Goyal