Union Budget FY21: Fixed Income and Macro Takeaways
The budget came under obviously difficult circumstances given the need to generate a net positive fiscal impulse in view of weaker economic growth, while honoring the need for some fiscal discipline against an adverse revenue picture. Measured against this ask, the finance minister has broadly delivered. The fiscal deficit numbers for the current year and next are in line with market expectations at 3.8% and 3.5% of Gross Domestic Product (GDP) respectively. Gross market borrowing for next year at INR 7,81,000 crores is similarly in the ball-park expectation range, while no extra borrowing for the current year is an unequivocal positive surprise for the market. A greater reliance on capital receipts, if fructified, will ensure that the fiscal impulse stays positive even as there is a 0.3% net consolidation in deficit into FY21.
The finance minister has also furthered the opening up of our local bond market to off-shore investors. Thus she has hiked participating limit for foreign portfolio investors (FPIs) in corporate bonds from 9% of outstanding currently to 15%. Also importantly, certain specified categories of government securities would be opened fully for non-resident investors, apart from being available to domestic investors as well. It may be argued that overall interest in Indian bonds is anyway muted for now and hence these expansions may amount to little in the near term. The other view to take could be that incremental ease of operation does bring in more flow (all other things being equal) and that especially the measure on government bonds could be in the direction of ultimate inclusion in global bond indices.
We present below a snapshot of some of the key numbers from the budget. We have compared the assumed growth rates versus those implied in the revised estimates for financial year (FY)20 against the actuals for FY19.
Source: CEIC, India Budget documents, IDFC MF Research. Note: Headline debt capital receipts and total capital receipts above are excluding ‘Draw down of cash balance’. BE means Budgeted Estimates. RE means Revised Estimates. FY is Financial Year.
Pressure Points
There are important pressure points that one has to be cognizant of:
- There is a possibility of downward revisions to the revised estimates for FY20 versus when the actuals come about like what happened in FY19, although the magnitude of such revisions is likely to be less adverse. This may make the budgeted growth rates for tax items look more challenging. Even as things stand some items, personal income tax growth for instance, are prima-facie looking somewhat aggressive.
- The nominal GDP growth assumption at 10% risks an undershoot in our view, given our less sanguine expectation on India’s cyclical recovery prospects. This is especially true now with a new headwind to global growth in the form of the Corona virus.
- Under non-tax receipts, the budget amount for communication services seems aggressive (INR 1,33,027 crores in FY21 versus INR 58,990 crores for revised estimate in FY20) given the well- known general stress in the sector which may impede ability to pay. Also, while there are new levers for generating capital receipts (including disinvestment of government stake in public sector banks and financial institutions), it may still be an uphill task and may require continuous action over the course of the year.
- There is a dramatic reduction in allocation to Food Corporation of India (FCI) (budgeted amount of INR 1,51,000 crores in FY20 that has reduced to INR 75,000 crores in the revised estimate and is budgeted at INR 77,983 crores in FY21). Absent a dramatic actual rationalization to food subsidies details on which don’t seem to have been shared, this amount reduction may have been an important ‘pressure valve’ to show optical reductions in spending under budget stress. By up-fronting recognition of this reduction, this valve may no longer be available.
- This pertains to financing of deficit rather than the deficit itself: small savings collections are expected at INR 2,40,000 crore in FY21. This is the same as in FY20 and represents the higher run-rate of collections that has been witnessed in the current financial year. Thus there is a lesser likelihood for a ‘positive surprise’ buffer here than was the case in the current financial year. Also, the amount budgeted for buy-backs of bonds is lower at INR 30,000 crores versus INR 50,000 crores in the FY 20 budget. This has been another buffer available to offset prospects of extra borrowing in case of fiscal slippages (it is to be noted that it is through exercising these buffers that the government has managed to keep borrowing unchanged for the current fiscal year despite slipping on the deficit target). Against these, however, there is one counterpoint: the government is actively seeking to build INR 53,000 crores of cash balance in FY21, which it can easily dispense with if required.
Takeaways
Pressure points notwithstanding, the budget has ticked the most important boxes for the bond market, chiefly around a reasonably anchored gross bond supply and some visibility on a bond index inclusion plan (subsequent comments from the Chief Economic Advisor have indeed linked the bond limit relaxation to plans for index inclusion). The underlying global environment is unequivocally bullish bonds. A muted late cycle global growth dynamic may be further impacted with the Corona virus outbreak. Although slightly premature to say, but reaction functions of global central banks may accordingly change as well to take into account this new growth headwind. These dynamics may increase local market risk appetite for bonds for now. However, sustenance of this appetite will require the bond inclusion plans to take traction and / or a continued commitment from RBI on term spread targeting.
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