(Photo by HT; Graphic by Vipul Sharma/Mint)
(Photo by HT; Graphic by Vipul Sharma/Mint)

RBI’s faith in govt on fiscal prudence to be tested in upcoming Union budget

  • Though deficit has reduced over the years, the government’s off-balance-sheet borrowings have ballooned
  • Economists say that there is very little navigation space available to the government to manage capital expenditure and the demands of the rural sector, which is in distress

Mumbai: Reserve Bank of India (RBI) governor Shaktikanta Das is no stranger to the government’s accounts, having been part of the overhaul of the tax regime himself in his stint as revenue secretary. He could also have some idea about how finance minister Nirmala Sitharaman thinks, as the two have worked together before.

However, his faith in the government’s numbers will be put to test when Sitharaman presents the budget on 5 July. Economists are wary that the slowdown in economic growth would mean modest tax revenues even as the impulse to spend more increases.

“A daunting task awaits in FY20 with a 1 trillion or 50bps slippage likely on the fisc even if goods and services tax (GST) collections rebound," analysts at Jefferies India Pvt. Ltd had written in a recent note to clients. An aggrieved farm sector would need subsidies to heal itself, which could mean Sitharaman will have to set aside money for an increase in subsidies.

This would be in addition to the continued heavy lifting in public investment to lure private sector firms to create capacity. Economists say that there is very little navigation space available to the government to manage capital expenditure and the demands of the rural sector, which is in distress.

To be fair, Das has little reason to doubt the central government’s fiscal deficit number. For FY19, the centre has been able to keep the deficit at the budgeted 3.4% of gross domestic product (GDP).

However, the key concern on the government’s budget is that fiscal deficit numbers are no longer the true picture of public finances. So, though the deficit has reduced over the years, the government’s off-balance-sheet borrowings have ballooned. Off- balance-sheet items have surged to 2.4% of GDP in FY19 from 1.4% three years ago.

Off-balance-sheet borrowings are those done by public sector enterprises and the Food Corporation of India (FCI). “Off balance sheet borrowings add to the overall supply of the bonds and thus weigh adversely on the rates markets sentiment, yields and thus transmission of rate cuts," said Anubhuti Sahay, senior economist at Standard Chartered Bank.

Das has defended the threat from off-balance-sheet borrowing. “Lot of these PSUs undertake capital expenditure. It is better to look at that borrowing as capital investment required by the economy. Borrowings that are supported by revenue streams of their own to repay their borrowings should be taken as part of the industrial or commercial sector of the economy," he said.

Not all borrowings by public sector entities depend on the government. That said, the supply of bonds by these entities tends to reduce the funds available to the private sector. Hence, a large public sector borrowing is creating uncomfortable liquidity conditions for the private sector and even increasing their costs.

The government has budgeted a fiscal deficit of 3.4% of GDP for FY20. This would be at the same level as FY19, indicating that it has not loosened its purses. But the deficit means little if off-balance-sheet borrowings are not reduced. Das’s predecessors were more wary when it comes to the government’s promises on fiscal deficit. He would not only have to contend with the overall deficit number but also what it represents.

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