The Union Budget 2019 was against a backdrop of considerable challenges. This is because for financial year 2019-20, the direct taxes and GST collection numbers had come in lower by Rs. 1.4 lakh crore as against FY19's revised estimates. This made the FY20 interim budget estimates look very high and difficult to achieve. Thus, even as the market was clamouring for an incremental fiscal stimulus, the larger issue on the table was one of budget credibility.
Given this, the finance minister has executed a remarkable balance of restraint and optimisation. In the final budget, FY20 estimates were cut by Rs 51,000 crore for income tax and Rs 98,000 crore for GST collections. However, no overall expenditure cuts or higher borrowing is planned. This reduction in revenue estimates is planned to be met by higher customs (Rs 11,000 crore), excise duties (Rs 40,000 crore), non-tax revenues (Rs 41,000 crore from higher RBI and nationalised bank dividends, possible spectrum auctions, etc.) and higher non-debt capital receipts (Rs 17,000 crore from disinvestments, etc.). Overall, budget deficit as a percentage of deficit has been compressed nominally to 3.3 percent, owing to a marginal expansion in the nominal GDP.
While budget assumptions are now much more credible than those presented in the interim budget, the tax numbers are still basis somewhat optimistic assumptions, especially given the context of slowing economic growth. This is evident when the growth numbers assumed are looked at versus the actuals for FY19. However, correspondingly, there are levers that can still be pulled, for instance, on capital receipts or with moving some subsidy financing below the line, as has been done in the past.
The budget is definitely bullish for the bond market. Not only has fiscal restraint been exercised and interim budget numbers on gross and net borrowing been kept unchanged, but a plan has also been unveiled for the sovereign to conduct part of its borrowing offshore. Thus, as per indications from the finance secretary, approximately up to 10 percent of the gross borrowing program for the year can be conducted offshore in the current financial year. This is a welcome step in order to temporarily alleviate the problem of crowding out of that is currently being experienced by the bond market. Also, given the sovereign’s very small external debt exposure thus far, this can be done at this juncture without courting any sort of macro financing risks.
The RBI governor, alongside at least two other members of the monetary policy committee (MPC), has seemingly sounded sympathetic towards a view of some fiscal expansion. Put another way, given where we are in the global and local business cycle, some fiscal expansion had it been undertaken would not have curtailed further monetary easing. However, with the finance minister exercising full restraint on the fiscal, the case for monetary easing has become even stronger. This, alongside trends in global yields as well as the recent pivot in RBI’s liquidity stance, paints a constructive backdrop for quality bonds.
Suyash Choudhary is head - fixed income, IDFC AMC.