SBI Ecowrap - Fiscal deficit for FY23 could be in the lower end of 6-6.5%: Gross borrowings of Centre at Rs12 lakh crore

20 Jan 2022 , 10:52 AM

After the economic jolt in FY21 due to COVID-19 outbreak, India’s economy is slowly recovering. Thus, the main objective of the budget should be to create an environment by creating an enabling condition by giving higher weightage to short term stabilization policy rather than long term policy. The budget should also allow for very gradual fiscal consolidation. For FY23, the fiscal consolidation should remain limited to 30-40 bps from the current fiscal. Assuming that the Government keeps the expenditure growth at 8% over FY22 estimates at Rs 38 lakh crore in FY23 and receipts (minus borrowing and other liabilities) would grow by ~10.8%, it would lead to fiscal deficit of around Rs 16.5 lakh crore or 6.3% of GDP in FY23.

If disinvestment of LIC passes through in FY22, Government might be ending fiscal with a large cash balance of Rs 3 lakh crore. This can come handy in supporting a large part of government fiscal deficit without taking recourse to market borrowings. We caution that any new taxes like wealth tax or others at this point could do more harm than benefit .

Against this background, we thus believe net market borrowing of the Centre will be around Rs 8.2 lakh crore and with repayments of Rs 3.8 lakh crore, gross borrowing are expected at Rs 12 lakh crore (73% of the FD). Interestingly, in FY22, RBI has done OMOs of around Rs 2.6 lakh crore that did support a large Government borrowing programme without disruptions. In FY23, sans the support of such OMOs, but with Rs 1.5 lakh crore expected through inclusion in bond index and credit off take also picking up recently, there will still be northward pressure on bond yields. Unless EM bond index announcement happens in budget with first inflows starting in H2FY23, bond yields are in for major realignments in FY23. The overall gross borrowings by Centre and States is likely to be around Rs 21 lakh crore (Rs 19.7 lakh crore in FY22) and net borrowings around Rs 14.8 lakh crore (Rs 15 lakh crore in FY22). However, the movement in bond yields may also have a sobering impact given the proposed tweaks by RBI regarding bank’s investment portfolio.

Regarding sector-specific suggestions, 6.33 crore MSME units in India contribute ~29% to India’s GDP, employing over 11 crore workers. Credible source to verify cashflow and seamless access for Banks to GST 4 / ITR on real-time basis should be allowed for lending to SMEs. Separately, availability of real time information on a single window by Government through a regulatory architecture from various sources viz. Income Tax, Ministry of Corporate Affairs (Registrar of companies), Customs, Land Records, SEBI, Credit Information Companies, Banks and Courts (for legal cases if any) for a company/ borrower, will significantly enable informed credit decision in future for all borrowers.
The pandemic has created a renewed interest in the MSME space with a behavioral shift in bank lending to such units surpassing all expectations on the back of ECLG scheme launched by the Government. The ECLG scheme must be extended with necessary policy tweaks till FY23. This will also enable completion of the entire targeted Rs 4.5 lakh crore of credit flow under this scheme.

Additionally, given the little success of federal guarantee scheme of CGTMSE in anchoring SMEs in its two decades odd existence, budget should explore reorienting the institution along the lines of US-SBA as a facilitator towards starting and expanding business by SMEs. Such an agency should be singularly entrusted with a complete end-to-end digital platform with a primary focus on cash flow-based lending by financial intermediaries.

As on 31st March 2021, the data suggest that KCC loans for ASCBs aggregated to about Rs 7.53 lakh crore through 7.3 crore active KCC card users, which constitute about 55% of the total agricultural loans outstanding by all the banks. It is intriguing that access to KCC loans is renewed every year only after the farmer has paid both the principal and interest amount in totality. We propose that renewal of KCC loans of small and marginal farmers and for loans of other categories of farmers for amounts up to Rs 3 lakhs, the payment of interest should be an enough condition for renewal. Additionally, the interest subvention benefit which at present accrues only for crop cultivation and working capital loans for allied agricultural activities can be extended to cover term loans for investment credit purposes availed by small and marginal farmers without increasing the overall loan limit . This will spur investment credit for minor purposes on the field including drip irrigation, scientific mulching, land development for rainwater harvesting, water pumps, water shed management etc at the individual farm level. The above measure has the potential to also reduce credit cost for banks considerably on KCCs as NPAs can be prevented more easily and if the above suggestion is agreed upon by RBI, interest rate on KCC loans can be further reduced.

The author of this article is Dr.Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India

The views and opinions expressed are not of IIFL Capital Services, indiainfoline.com