 "bond yields")
On May 4, as the Reserve Bank of India (RBI) Governor Shaktikanta Das announced an out-of-cycle rate hike, the yield on the benchmark 10-year government of India bond (G-sec) rose 3.64 per cent, the highest single-day rise so far this calendar year, to reach their highest levels since May 2019.
In fact, since January 1, benchmark bond yields have risen more than 14 per cent, as Russia’s invasion of Ukraine has led to a spike in global commodity prices and disrupted the flow of liquidity.
For the Centre and states, higher yields mean higher cost of borrowing. Going by the information available so far, things could look especially worrisome for the Centre, as higher borrowing costs adds to higher subsidy burden, which it already faces.
“While we don’t look at a single day but the entire span of a year, interest costs and subsidies do point to a situation which is not ideal,” a senior government official told Business Standard. “For now, it is manageable, but the latitude to manage shrinks with every uncertainty,” the person said.
According to analysts, however, what counters this is the fact that higher inflation will lead to higher nominal gross domestic product growth and hence higher tax collections. “I think the rise in subsidy burden due to fertiliser and food could be offset to a large extent by buoyant tax revenues as well as disinvestment receipts. There could be a slippage of Rs 10,000-20,000 crore which could be absorbed by higher nominal GDP,” said Madan Sabnavis, chief economist, Bank of Baroda.
The Centre’s fertilizer subsidy outlay for the year could be Rs 2.10-2.30 trillion while the decision to extend the PM Garib Kalyan Anna Yojana till September will increase the food subsidy outlay for FY23 to Rs 2.87 trillion from Budget estimate of Rs 2.07 trillion. Officials have maintained there will be no compromise on the Centre’s Rs 7.5-trillion capital expenditure plan.
“The spike in borrowing costs is going to have a big impact, but the question is how much is the centre willing to go in terms of reducing inflation shock or supporting consumption,” said Rahul Bajoria, India Economist, Barclays.
Bajoria expects that the free food scheme could be extended for the whole year and that the Centre may be compelled to cut excise duty further if prices continue rising, thus leading to further fiscal stress. “The FY23 fiscal deficit target of 6.4 per cent (of GDP) was conservative; it could be closer to 7 per cent. It won’t be a fiscal blowout though,” Bajoria said, adding that the Centre cannot afford slippages on the revenue front.
“Borrowing cost will definitely go up but it may not be really much, given the size of the Budget. Borrowings are pegged at Rs 14.31 trillion, if it goes by 50 basis points, we are talking of Rs 7,500 crore more which would be spread over 15-20 years,” said BoB’s Sabnavis.
The Centre will borrow Rs 8.45 trillion from the bond markets in the first half (April-September) of FY23. This will be around 59 per cent of the full year gross borrowing target of Rs 14.31 trillion.
Analysts across the board agree that the fiscal deficit target and net tax revenue target (Rs 19.34 trillion) in the Budget were conservative and hence provided a cushion. That cushion is now gone.
“The nominal GDP growth assumed in the budget is only 9.1 percent higher than the National Statistical Office's second advance estimate for 2021-22. We expect nominal GDP to expand by around 14 percent in FY2023, which will help to moderate the size of the fiscal deficit relative to the nominal GDP for this year,” said Aditi Nayar, Chief Economist with ICRA Ltd.
“The Centre's gross tax revenues in FY2022 are only marginally lower than the budget estimate for FY2023, suggesting a considerable cushion to absorb the higher subsidies, even if the government eventually cuts excise duties on petrol and diesel to pre-pandemic levels,” Nayar said. “The state's fiscal deficit cannot exceed 4 per cent of their GSDP, of which 0.5 per cent is dependent on power reforms. Much of it would depend on the Centre's tax devolution and timing of it,” Nayar said.
