Last Friday, the central government announced its revised borrowing calendar for the financial year 2020-21. It pegs the Centre’s borrowings at Rs 12 lakh crore, up from the earlier budget estimate of Rs 7.8 lakh crore. This sharp rise in the government’s borrowing does not come as a surprise. With economic activity collapsing, and government revenues expected to plunge, maintaining expenditure at the budgeted levels will itself require a significant increase in borrowings. The Centre has not clearly spelt out whether these additional borrowings are meant for plugging its revenue gap, and/or to fund its relief or stimulus package.
Central government finances were under pressure even before the COVID pandemic. In its latest budget, it had projected gross tax collections to grow by 12 per cent (as compared to the revised estimates) to touch Rs 24.23 lakh crore in 2020-21, up from 4 per cent in 2019-20 (RE). But with sluggish economic growth, and concerns over whether the government will be able to achieve even the revised revenue target for 2019-20, these projections were optimistic to say the least. Now, with the sharp deceleration in economic activity, and a quick broad-based recovery unlikely in the near term, the Centre will miss not only its direct and indirect tax targets this year, but will find it difficult to meet even its disinvestment goal of Rs 2.1 lakh crore. With even state governments likely to increase their borrowings this year, markets will be apprehensive of the scale of the general government borrowing programme. The 10-year bond yield rose as much as 27 basis points to 6.24 per cent on Monday in reaction to the revised borrowing calendar, ending the day at 6.16 per cent. The focus will now shift to the RBI and whether it announces an expansion of its open market operations this year. The data so far shows that the RBI has net purchased around Rs 1 lakh crore of bonds this financial year.
Given the magnitude of the changes in the budget projections this year, the Centre as well as state governments would do well to rework their budget math. A re-statement of their budgets would help provide clarity on the state of their finances. Further, the Centre needs to present a medium-term fiscal roadmap, laying out in detail how it expects economic activity to shape up, how it plans to support the economy during this period, as well as a clear path of exiting from the use of any unconventional policies that may be adopted during this period. Such a credible framework would help alleviate concerns.