The government will probably dip into the National Small Savings Fund (NSSF), should expenditure on welfare schemes breach the budgeted goals and tax revenue trail the targets, while relying less on market loans for repayments, sources told FE. The gross market borrowing target of Rs 7.1 lakh crore for FY20 is unlikely to be raised meaningfully in the coming Budget since the government would avoid pressuring the yield and crowd out other borrowers.
The government’s reliance on NSSF has only grown in recent years. From just 1.8% in FY13, NSSF funds financed 19.7% of fiscal deficit in FY19 and are budgeted to contribute 18.5% of the deficit in FY20, according to analysts at Kotak Institutional Equities.
The Interim Budget pegs NSSF drawings at Rs 1.30 lakh crore this fiscal, only slightly more than the Rs 1.25 lakh crore in FY19, to part-fund a fiscal deficit of Rs 7.04 lakh crore or 3.4% of GDP. But government officials said the withdrawals could be higher if revenue collections fall short, as they did in FY19. “With the bond yield now below 7%, we don’t want it to rise again and raise borrowing costs for others as well,” an official said, adding: “Most state governments are not tapping NSSF now after change of rules so that money has to be used.”
The Interim Budget has pegged the Centre’s net market borrowing at Rs 4.73 lakh crore for FY20 against the revised estimate of Rs 4.23 lakh crore last fiscal. The projected FY20 gross market borrowing (including loans for repayment) of Rs 7.1 lakh crore is much higher than Rs 5.71 lakh crore in FY19.
Last fiscal, too, the government drew as much as Rs 50,000 crore more from the NSSF and cut gross market borrowing by Rs 34,539 crore from the over Rs 6.05 lakh crore projected earlier.
This was done to calm the bond markets as the yield had breached the 8% mark. Earlier this month, the yield on the 10-year government bond yield closed below 7% for the first time since November 2017.
Thanks to the attractiveness of small savings schemes and demonetisation, the NSSF has been flush with funds in recent years. Net NSSF funds stood at Rs 1.57 lakh crore in FY18, having taken a massive leap from just Rs 3,094 crore in FY12, according to the National Savings Institute data. Of course, NSSF has seen wide fluctuations — net funds were as much as Rs 96,788 crore in FY05 before starting to slide. If the trend up to November 2018 continued throughout the last fiscal, the net NSSF kitty would have been worth over Rs 1.5 lakh crore in FY19, and the government expects the funds to remain around the same level in FY20 as well.
Of course, given that the government would continue to resort to undeclared extra-budgetary resources (EBRs) through larger PSU borrowings to part-fund spending, the precise impact of the government’s market borrowing remains hazy. As FE reported earlier, the EBRs could rise to as much as Rs 1.86 lakh crore from Rs 1.22 lakh crore envisaged in the Interim Budget. The EBRs were to the tune of Rs 1.36 lakh crore in FY19. With uncertainties over the RBI’s surplus transfer to the government, the centre could eventually turn to greater EBRs.
Faced with an unenviable task of addressing farm distress, creating jobs and reversing a slowdown in economic growth that hit a five-year low in the March quarter, the government is expected to announce a slew of incentives to prop up private consumption and stimulate investments. Already, the move to widen the PM-Kisan scheme alone is estimated to cost Rs 15,000 crore more a year from the budgeted Rs 75,000 crore. Expectations of bonanza for the low-cost housing and labour-intensive sectors will further pressure the fisc.
The growth of net tax revenue turned out to be just 6%, compared with 19% estimated (BE), so, the ask rate of growth to meet the Interim Budget target is now a daunting 29%. As for non-tax revenue, in the absence of a buyer for Air India yet, the government could rope in other CPSEs to buy out its stake in some other CPSEs (like the ONGC-HPCL deal in FY18) to boost disinvestment proceeds. But meeting the disinvestment target of Rs 80,000 crore remains a challenge if market conditions don’t improve further. Also, given the growing US-Iran tension, analysts remain concerned over sticky global oil prices, which could potentially pressure bond yields again.