Fiscal Math Of Central Government To Be Disturbed: Report

The Centre's FY22 fiscal math is likely to get disturbed by 0.5% to 7.3% of GDP, Emkay Global Financial Services has said in a report as the vaccination budget of the government swells.

"The fiscal hit in the form of lower divestment, higher doles on food/fertilizer subsidy, health and NREGA may outstrip buffers such as bumper RBI surplus and wholesale inflation-led higher nominal GDP. Capex adjustment (cuts) could turn out to be the balancing/offsetting factor," the broking firm has said.

According to Emkay Global the Centre's latest decision to dismiss vaccine decentralization and tiered-pricing is indeed an optimal strategy to maximize welfare and minimize cost for general government. However, the flipside is that Centre's vaccination budget would swell to Rs450-550bn (0.2% of GDP) vs. estimated Rs 100-120 billion based on the earlier arrangement between Centre and States.

"FY22 Gross G-sec borrowings could increase by Rs 650 billon+ on top of Rs12.05 trillion. This, in conjunction with additional issuances of Rs1.6 trillion for GST compensation to states, will ensure pressure be felt across the G-sec curve. The GSAP+OMOs might have to be propped up beyond Rs6tn to balance the ensuing supply-demand mismatch and keep yields range-bound.

In the near term, we are neutral on bonds amid the central bank's active support anchored at the benchmark 10-yr paper. However, we see yields inching up in an orderly and gradual fashion in H2FY22. We expect the yield curve to bear-flatten and see benchmark 10-yr yield in the range of 6.0-6.40% for the remainder of FY22.

The cost of vaccination: changing dynamics?

According to Emkay Global the Centre's latest proposition to take over the vaccination drive from states is a welcome decision.

"We reckon that the centralization of negotiations and administration will improve vaccine efficiencies. While this would reduce net cost to general government, Centre's health spending burden will increase. The total cost of universal jabbing by Centre - which we assume will also include below-18 age category post Oct'21 - is estimated to increase to Rs 450-550 billionn (~0.2% of GDP), " Emkay global has said in its report.