Increased borrowing of ₹4.2-lakh crore by the central government in FY2021 is unlikely to translate into meaningful fiscal stimulus, unless the Centre sharply cuts the budgeted capital expenditure and re-prioritises expenditure, according to India Ratings and Research (Ind-Ra).
The increased borrowing will largely take care of its revenue shortfall, leaving little space for fiscal stimulus, it said.
The credit rating agency expects the revenue shortfall to account for 95.1 per cent of the increased borrowing, leaving a purse of just around ₹20,000 crore for the central government to provide fiscal stimulus. This is too small an amount to make a difference to the sagging economic activities/demand, it added.
Clearly, the challenge is huge with hardly any fiscal space, despite increased gross borrowing of ₹4.2-lakh crore, it emphasised.
Nonetheless, Ind-Ra believes the onus is on the central government to provide support to not only vulnerable sections of the society but also state governments, because the actual battle against Covid-19 and associated expenditure is incurred by the state governments.
On May 8, the Reserve Bank of India, in a statement, said the estimated gross market borrowing in financial year 2020-21 will be ₹12-lakh crore, compared to ₹7.8-lakh crore as per the Budget estimate for the year. This revision in borrowing has been necessitated on account of the Covid-19 pandemic, it added.
Revenue shortfall of ₹4-lakh crore
Notwithstanding the low crude prices and increased excise on petrol and diesel, Ind-Ra estimates the gross and net tax revenue of the central government in FY21 to fall short of the budgeted estimate by ₹4.32-lakh crore and ₹2.52-lakh crore respectively.
As weak economic activities will also have an impact on non-tax revenue, the agency expects dividend and profit and other non-tax revenue to decline by ₹1.48-lakh crore from the FY21 Budget estimate. This means the central government is staring at a revenue shortfall of ₹4-lakh crore from the FY21 budget estimate.
Financial conditions to tighten
estimates the net market borrowing of central and state governments in FY21 to be ₹14.9-lakh crore (7.4 per cent of GDP).
While the system has surplus liquidity and the RBI is absorbing nearly ₹8-lakh crore in the reverse repo window, the agency expects the financial condition to tighten and volatility in the financial market to increase in FY21.
During the period March 1, 2020 to May 11, 2020, banks sanctioned loans of around ₹6-lakh crore to micro, small and medium enterprises (MSMEs), agriculture, corporates and non-banking financial companies (NBFCs).
In a tighter financial market with limited fund availability, the agency cautioned that the government would crowd out the private sector in the first step, and in the second, large borrowers would crowd out small borrowers.
Ind-Ra believes the RBI has to play on the front foot and use all instruments such as open market operations, repo rate, operation twist and currency swap to ensure minimum fallout of the higher borrowings on interest rate.
Nonetheless, Ind-Ra is of the view that interest rate will remain elevated, and deflecting some of the government borrowings towards small savings funds would reduce the interest rate on market borrowings.