This once it is not the RBI but the government that can help push down bond yields. The fiscal data for April to January released on Friday shows that the government is most likely to overshoot its tax revenue targets by about Rs 1.5-Rs 1.8 lakh crore, while it could fall short of spending the revised budgeted amount of Rs 34.5 lakh crore, since it has only a month to go.
Given these numbers, the government may post a fiscal deficit well short of the Rs 18.48 lakh crore that it has estimated. The government can thus easily cancel the extra Rs 80,000 crore it said it would borrow from the market this year; such cancellation can lead to a rally in bond prices, helping banks, borrowers, and the economy.
| HOW GOVT CAN HELP BOND MKT |
| FISC – APRIL-JAN |
| *FY20 tax revenues may be Rs 1.5-1.8 lakh crore more than RE |
| *FY20 exp may be Rs 80,000 crore less than RE |
| *Govt in a comfortable spot to cancel extra Rs 80,000 crore of market borrowing |
Gross Tax Revenues (GTR) from April to January stand at Rs 15.15 lakh crore, only 1 percent below tax collected in the same period last year. Since October, the year-on-year increase in tax collections has been close to 30 percent.
In January itself, the total tax collected was Rs 1.77 lakh crore, 20 percent higher than year-ago levels. It stands to reason that tax collections in Feb- March this year will also be at least 20 percent higher, perhaps even more since March of 2020 was a washout in terms of economic activity.
Even assuming tax collections are flat in Feb-March, the FY20 tax collection will be higher by Rs 1 lakh crore than the revised budget estimates of Rs 19 lakh crore. If taxes in Feb-March grow in the same proportion they rose in January, tax revenues will be Rs 1.8 lakh crore more than the revised budget estimates. It is hence easy for the government to forego the extra Rs 80,000 crore of borrowing announced in the Budget 2021.
| FISC – APRIL-JAN |
| TAX REVENUE |
| April-Jan tax revenue at Rs 15.15 lakh crore, down 1% vs year-ago level |
| FY21 tax RE (revised estimates) assumed at Rs 19 lakh crore in Budget |
| Tax revenue needed in Feb-March = Rs 3.85 lakh crore |
| Tax collection in Feb-Mar FY20 was Rs 4.79 lakh crore |
| If tax revenue in Feb, Mar flat YoY, FY20 tax revenue will overshoot by Rs 1 lakh crore |
| Alert: Tax revenues in Oct-Jan 27% higher than year-ago period |
| Very good chance of FY20 tax revenue overshooting RE by Rs 1.5-1.8 lakh crore |
| Rs 60,000 crore short on net non-tax revenue with 2 months to go |
| Easy for centre to cancel Rs 80,000 crore extra borrowing and push down bond yields |
From the expenditure side as well, some shortfall vis-a-vis budgeted FY20 estimates cannot be ruled out. The Apr-Jan expenditure stands at Rs 25.1 lakh crore, and the full-year estimate is Rs 34.5 lakh crore. This means the government has to spend Rs 9.4 lakh crore in two months -- February and March. Last year, in the same period it could spend only Rs 7.74 lakh crore.
Let's assume the government expenditure rises at the same pace it rose from April to January this year, i.e by 11 percent. Then the total expenditure for FY20 rises to about Rs 33.6 lakh crore -- still a good Rs 90,000 crore short of the revised budgeted expenditure for FY20.
FISC – APRIL-JAN
EXPENDITURE
| | RE | Actuals |
| Total Exp | 34.5 | 25.1 |
| Rev exp | 30.1 | 21.55 |
| Capex | 4.38 | 3.62 |
| Govt exp needs to increase by 20% YoY to reach expenditure estimated budgeted as RE |
| Alert: Govt spent Rs 7.74 lakh crore in Feb-Mar 2020 |
| Alert: Apr-Jan expenditure up 11% |
| If expenditure grows by 11%, not 20%, govt will save Rs 80,000 crore |
Short point, the government can cancel the extra Rs 80,000 crore borrowing and thus lower yields in the market, which will have multiple beneficiaries:
1. Government gets a lower borrowing cost
2. Banks, including PSU banks, Will avoid mark-to-market losses
3. Borrowers - corporates and retail - can enjoy lower borrowing costs and this, in turn, will benefit the economy.
