Vijay Kumar Gaba

As per media reports, the finance ministry officials shall start exercise for preparation of Union Budget for FY22 from 16 October 2020. The exercise usually starts with the finance ministry official and the finance minister meeting with various stakeholders, especially the business representatives; representatives of professional bodies like ICAI; officials from other administrative ministries; officials from state finance ministries; and policy making and statistical bodies etc. The suggestions made in these meetings are then considered in the preparation of final draft the budget documents.

Budget making is normally a very complex exercise that requires special skills to strike an optimum balance between the expectations of various stakeholders. These expectations are invariable at odds with each other. Therefore pleasing most of the stakeholders is almost an impossible task. In past many finance ministers have used some Big Bang announcement to overwhelm the stakeholders so that they are motivated to ignore their parochial interests for a promising bigger picture. The instant reaction of financial markets to all such big bang announcements is usually “ebullient celebration”. The euphoria however subsides in few weeks and markets usually return to their normal trajectory.

The budget making exercise for FY21 would be particularly complex for a myriad of reasons.

Firstly, the government has already announced multiple fiscal and monetary packages during the course of FY2 in the wake of the socio-economic lockdown announced as preventive measure for COVID-19 pandemic. There may not be much scope for giving any further relaxations in the budget; even though the stress in most sectors of the economy is still elevated and almost everyone is looking for a further, stronger dose of stimulus.

Secondly, the shortfall in revenue collection during FY21 is unlikely to be completely made up in FY22. The fiscal balance of the government thus remains precarious. The 2HFY21 borrowing schedule announced by the government is a clear indication that the government (i) does not want any significant deterioration in the head line fiscal deficit number; (ii) may encourage PSUs, Railway and States to raise resources on their own account; (iii) may accelerate the effort to disinvest its stake in PSUs like LIC, BPCL, etc.

This essentially means that both debt and equity markets will remain adequately supplied for most of next 12-15 months. The profile of the sovereign and quasi sovereign debt available in the market will deteriorate significantly with PSU corporate debt and state debt dominating the fresh supply. There could be a paradoxical situation where the benchmark yields are sustained at lower level by the maneuvering by RBI, while the spreads of center-state debt and 10yr-PSU bonds spread rise materially. The situation may worsen further if the business activity picks up sharply, leading to compression of credit-deposit gap, thus leaving banks with lesser resources to absorb the excess supply of sovereign and quasi sovereign paper.

Failure to implement agenda for disinvestment of strategic assets like BPCL, Air India etc, may force the government to dilute holdings in profitable PSUs like Coal India, NTPC, BEL and LIC. This will keep the equity markets well supplied throughout the year, capping any material upside due to liquidity.

Thirdly, the government would be constrained to raise fresh revenue through taxes and additional cess; especially when the dividend from PSUs is likely to dwindle further and elections to key states of UP and West Bengal would require continuous additional social sector spending. This will be the trickiest situation. Obviously, rich would be burdened with additional taxes and stocks markets usually do not like the rich people to be bothered much; and the government would like stock markets to be happy so that it can sell whatever it wants to. It would be interesting to watch how the finance minister manages to get out of this loop. The best place to watch this opera would be from the top gallery which is farthest from the arena.