Mr. Abheek Barua, Chief Economist, HDFC Bank Ltd.

HDFC Banks Treasury has recently come up with a Report on Union Budget 2020-21.  In this report  take a look on how the fiscal math is likely to unfold this year and what can be expected from the 2020-21 budget.

♠ In our opinion the 2020-21 budget is unlikely to mark a radical departure from past budgets. While a fiscal slippage this year seems inevitable, the government is likely to make every effort to attempt consolidation in 2020-21 to 3.4 to 3.5 per cent of GDP. The decision by the finance ministry taken on the 30th of December to cap government spending by different ministries in the last quarter (at a time where government spending seems critical to support growth) seems to us a clear indication of the government’s stance.  This means that that a major fiscal stimulus to ramp up growth is pretty much ruled out.

♠ There might however be some tweaks in personal income tax slabs or perhaps even the rates but they are likely to be minor. The government might attempt to increase the amount of cash transfer – perhaps supplement PM Kisan—but while these measures would be played up in the budget speech the amounts allocated under these heads are likely to be small. We do not anticipate any unconventional measures either like a bad bank for NBFCs that would purchase toxic assets.

♠ Our assessment is that the government will project a real GDP growth rate of 6.5 per cent and inflation (as measured by the GDP deflator) at 4 per cent taking nominal growth to 10.5 per cent. It will assume some improvement in tax buoyancy on the back of better GST collections and improved direct tax take. The big bets for funding will remain on disinvestment including asset monetization.

♠ The government does not appear to be ready to do a foreign currency sovereign bond issue in the international markets. However, given the paucity of domestic savings, public sector units might issue more paper abroad. The direct financing needs of the government could be handled by raising the limits further on rupee investment in the local G-Sec market.

♠ For the current fiscal year, we expect the fiscal deficit to breach the budgeted target by 20-30 bps, coming in at 3.5%-3.6% of GDP weighed down by lower direct, indirect (including GST) collections. In addition, lower than budgeted Nominal GDP to also be a pressure point. On the other hand, RBI dividend transfer and expenditure compression to provide some cushion to the Centre’s finances.

♠ Tax buoyancy is expected to drop below the budgeted level in FY20 (Gross tax buoyancy to fall to 0.6 vs. budgeted 1.7). Even after removing the impact of the corporate tax cut, buoyancy is expected to remain low, signalling the lack of an improvement in tax collection efficiency and compliance (Tax buoyancy measures the tax collected per unit of GDP and is therefore neutral to the economic growth scenario while reflecting the efficiency of collections).

♠ Additional borrowings to be limited: The smaller quantum of fiscal slippage this year suggests that additional market borrowings are likely to be limited. As a result, we expect the upward pressure on bond yields to be contained. Moreover, OMO operations by the RBI are likely to support yields further. On the flipside, the high inflation prints over the coming months are likely put pressure on yields. On the balance, we expect the 10 year to trade in the range of 6.40%-6.60% by March-end. For next year, with a fiscal deficit target of 3.4%, we expect gross borrowings to be close to Rs. 7.7 trn.

Download HDFC Bank Report titled – Pre-Budget: Mounting Fiscal Pressures

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December 2020