What The Government’s Increased Borrowing Tells Us About Its Finances

The government’s decision to increase its planned borrowings for 2020-21 by a steep 54 percent to Rs 12 lakh crore shows that the headline fiscal deficit for the year could be atleast 2 percentage points wider than budgeted, according to economists.

While the government did not announce a revised fiscal deficit target for 2020-21, the fact that it has chosen to alter borrowings for the full financial year shows the expected widening of the fiscal deficit.

The Ceteris Paribus Math

At the time of the Union Budget presentation in February, the government had projected a fiscal deficit of Rs 7.96 lakh crore. Gross borrowing for the year was pegged at Rs 7.8 lakh crore, while net borrowing, which goes towards the financing of the FY21 budget deficit, was pegged at Rs 5.35 lakh crore. In addition, the government said it would borrow Rs 2.4 lakh crore from the National Small Savings Fund.

Since payments towards redemptions have not changed, the government’s revised net borrowing rises to Rs 9.55 lakh crore, in line with the revised borrowing plan.

If we were to assume that the nominal GDP growth assumptions made at the time of the budget hold, the fiscal deficit would work out to be 5.3 percent of GDP.

Former Finance Minister P Chidambaram, in a statement said the additional borrowing of Rs 4.2 lakh crore would take the government’s projected fiscal deficit to 5.38 percent of the GDP.

The Real Math Is More Complicated

The actual fiscal situation, however, will be very different due to sharp fall in nominal GDP growth that is being expected this year.

At a lower nominal GDP growth, not only will revenue growth be weaker than projected, the denominator for calculation of fiscal deficit as a percentage will be smaller, leading to a higher deficit as a percentage of GDP. In addition, weakness in the capital markets could mean that the record high disinvestment target may not be achieved.

“Given the fact that tax collections will be much lower than what was budgeted, given that disinvestment is going to be a problem and given the fact that GDP is not going to be anywhere the 10 percent that was budgeted, I think actual fiscal deficit could well cross 8 percent of GDP with just 1 percent of net additional spending,” said Ananth Narayan, associate professor at SP Jain Institute of Management and Research.

According to a report by Axis Bank Research, the centre’s tax revenue may fall to Rs 21 lakh crore against the budgeted Rs 24 lakh crore. Non-tax revenue and capital receipts, which includes dividends from PSUs, divestment, spectrum auctions, among others, could settle at Rs 4 lakh crore against the government’s budget estimate of Rs 6 lakh crore.

Axis Bank assumes a base case scenario of 1 percent nominal GDP growth in FY21, while adding that there is a great deal of uncertainty around the eventual outcomes.

Saugata Bhattacharya, chief economist at Axis Bank, said that in light of the significant changes, the government should consider releasing a supplementary statement of changes in receipts, expenditures and deficits.

Does Additional Borrowing Create Space For Fiscal Stimulus?

Since the government did not provide any reasons behind the increased borrowing, markets are left guessing whether this mostly covers the shortfall in revenue or creates room for further spending.

Economists are divided.

Amid expectations of revenue slippages on lower net revenue receipts which could amount to more than Rs 4 lakh crore, the extra borrowing could be tantamount to slippage of the same order, without any additional expenditure increase, said Madhavi Arora, economist at Edelweiss Securities in a note. Arora added that if the government decides to announce another round of stimulus, the fiscal slippage may rise further.

However, Rahul Bajoria, chief India economist at Barclays, said that increase in market borrowing, coupled with a hike in fuel taxes, which is expected to give the government an additional Rs 1.4 lakh crore, would not only reduce the pressure from estimated revenue loss of around 2 percent of GDP, but also give it room to scale up expenditure by Rs 1.9 lakh crore, or 0.9 percent of GDP.

Bhattacharya said that the next round of stimulus may include aspects such as loan guarantees, which may not involve an immediate outgo of funds. Still, additional spending will be needed.

“Over and above revenue slippage, the centre and state governments together might have to add between Rs. 3.5 and 5.5 lakh crore as stimulus,” Bhattacharya said. He argues that a larger fiscal stimulus is needed to partially offset the loss of income from the lockdown.

While concerns regarding the impact of such an expansion on sovereign debt and ratings are valid, the alternative could have longer lasting consequences, he said. “The alternative, however, of a much slower growth on the balance sheets of corporates (particularly MSMEs), financial intermediaries and households is likely to have worse economic consequences over the medium term, potentially requiring a much more vigorous fiscal response in the future.”