Even if budgetary spending is pruned by 20-40% for most departments, and even if revenues gather pace in H2FY21, it is going to be a close fight.
This is around 5 per cent of the total borrowings as 95 per cent of deficit financing is met through domestic sources, mainly market borrowings
With the government sticking to its borrowing target of Rs 12 lakh crore for FY21, the bond markets will breathe easy. Benchmark yields, which have been ruling at above 6% and closed Wednesday’s session at 6.02%, should not see a big spike. However, they might just get antsy later in the year if revenue receipts don’t see the expected pick up and the government-spends rise more than forecast. For the moment, the Centre’s H2 calendar of Rs 4.34 lakh crore, which runs till March, looks fine. The weekly auctions for Rs 27,000-28,000 crore end in January and are aimed at leaving the field open for the state governments.
The Centre is working hard to rein in expenses; budgetary spending in August fell 15% y-o-y against a 6% growth in July and the budget estimate of 13.2% growth for FY21, while net tax revenues declined by about 30% y-o-y in the April-August period. Even if budgetary spending is pruned by 20-40% for most departments, and even if revenues gather pace in H2FY21, it is going to be a close fight. Unforeseen spends—on defence or the pandemic—can’t be ruled out even if the government chooses not to unveil another tranche of fiscal stimulus. Right now though, it looks like the borrowing target will not be breached. As experts have pointed out, the Centre could always use the shorter-term T-bills or the WMA to tide over any shortfall.
However, the problem is more acute for the states, with the Rs 2.02 lakh crore borrowing limit put out by RBI for the October-December period appearing rather under-stated. As ICRA’s chief economist Aditi Nayar points out, the 24.9% increase in gross SDLs, implied by the indicative calendar for Q3, appears rather tempered relative to the 56.8% expansion seen in H1. Nayar estimates the states’ requirement for funds will shoot up to as much as Rs 4.7 lakh crore in Q4FY21 compared with Rs 2.5 lakh crore in Q4FY20.
While that could drive up yields for states, RBI is expected to keep liquidity plentiful so as to ensure there is no big spike. While the liquidity surplus with banks has come down to levels of Rs 4 lakh crore, deposits are growing at a fast clip of 11-12%; so, they should continue to buy gilts as they have been. Whether they are willing to stock up on SDLs remains to be seen. Even with gilts, they have not been getting the yields they want with RBI determined not to let them rise. But, given the big supply expected in H2—close to Rs 10 lakh crore between the states and the Centre—the central bank may just yield. Else, underwriters, who have bailed out bond sales in four of the last seven auctions, are going to be in a spot.