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investment grade reflects its expectation that India’s economy will recover following the
resolution of the COVID-19 pandemic and that the country’s strong external settings will act
as a buffer against financial strains.
1.2.1.3 Fiscal Deficit
Government revised its fiscal deficit target in the Union Budget 2020-21 from 3.5 per cent to
9.5 per cent due to increased expenditure on various schemes it announced to tide over the
COVID-19 pandemic and a sharp fall in tax and non-tax revenue receipts. The fiscal deficit for
FY21 was `18.21 lakh crore (9.2 per cent of GDP) as against the projected `18.48 lakh crore (9.4
per cent of GDP) in the revised estimate. In FY21, the total revenue was about `88,000 crore
higher than the `16 lakh crore estimated in the revised estimate. Total expenditure exceeded
the target of `34.5 lakh crore by about `61,000 crore. The increased revenue expenditure was on
account of the back ended release of food subsidies. Lower fiscal deficit was due to 5.9 per cent
higher net tax revenue collection and 23.9 per cent higher collection of non-debt capital receipts.
The fiscal deficit for the first two months during April-May 2021 limit to 8.2 per cent of Budget
Estimate. The tax collection during April-May period showed better growth, mainly on account
of record GST collection in April and a Collection of over `1 lakh crore in May. However, going
forward the magnitude by which the government of India fiscal deficit in FY22 will overshoot
the Budget Estimate of `15.1 lakh crore, will also depend on the disinvestment target of `1.75
lakh crore.
1.2.1.4 Bond Market & 10-year G-sec yield
Reserve Bank of India responded to the outbreak of the COVID-19 pandemic by engendering
easy financial conditions through the provision of abundant liquidity via bond purchases and
balance sheet policies. As a result, bond yields eased to all-time lows through 2020 and set
the stage for record corporate issuances as well as strong rallies in equities. Borrowing costs
in financial markets dropped to their lowest in a decade on the back of policy rate reductions
and abundant liquidity. Interest rates on short-term treasury bills, commercial paper (CP) and
certificates of deposit (CD) fully priced in the reduction in the policy rate and, in fact, traded
below it. The weighted average cost of borrowings in the gilt market dropped to its lowest
level and spreads between corporate and G-sec rates were compressed across all maturities.
In India, the benchmark 10-year yield, which had averaged 5.93 per cent during April 2020 to
January 2021 surged to 6.13 per cent on February 2, 2021, on the announcement of the market
borrowing programme of the Central Government. Following the announcement of a slew of
measures by the Reserve Bank of India (RBI) on February 5, the benchmark yield eased to 5.96
per cent by February 11, 2021. Thereafter, global spill overs sparked a stampede; by March 5,
2021, the benchmark yield in India had touched 6.23 per cent, but the RBI’s announcements
of large-sized operation twists soothed frayed nerves and settled it at around 6.21 per cent
Annual Report 2020-21 | 187
resolution of the COVID-19 pandemic and that the country’s strong external settings will act
as a buffer against financial strains.
1.2.1.3 Fiscal Deficit
Government revised its fiscal deficit target in the Union Budget 2020-21 from 3.5 per cent to
9.5 per cent due to increased expenditure on various schemes it announced to tide over the
COVID-19 pandemic and a sharp fall in tax and non-tax revenue receipts. The fiscal deficit for
FY21 was `18.21 lakh crore (9.2 per cent of GDP) as against the projected `18.48 lakh crore (9.4
per cent of GDP) in the revised estimate. In FY21, the total revenue was about `88,000 crore
higher than the `16 lakh crore estimated in the revised estimate. Total expenditure exceeded
the target of `34.5 lakh crore by about `61,000 crore. The increased revenue expenditure was on
account of the back ended release of food subsidies. Lower fiscal deficit was due to 5.9 per cent
higher net tax revenue collection and 23.9 per cent higher collection of non-debt capital receipts.
The fiscal deficit for the first two months during April-May 2021 limit to 8.2 per cent of Budget
Estimate. The tax collection during April-May period showed better growth, mainly on account
of record GST collection in April and a Collection of over `1 lakh crore in May. However, going
forward the magnitude by which the government of India fiscal deficit in FY22 will overshoot
the Budget Estimate of `15.1 lakh crore, will also depend on the disinvestment target of `1.75
lakh crore.
1.2.1.4 Bond Market & 10-year G-sec yield
Reserve Bank of India responded to the outbreak of the COVID-19 pandemic by engendering
easy financial conditions through the provision of abundant liquidity via bond purchases and
balance sheet policies. As a result, bond yields eased to all-time lows through 2020 and set
the stage for record corporate issuances as well as strong rallies in equities. Borrowing costs
in financial markets dropped to their lowest in a decade on the back of policy rate reductions
and abundant liquidity. Interest rates on short-term treasury bills, commercial paper (CP) and
certificates of deposit (CD) fully priced in the reduction in the policy rate and, in fact, traded
below it. The weighted average cost of borrowings in the gilt market dropped to its lowest
level and spreads between corporate and G-sec rates were compressed across all maturities.
In India, the benchmark 10-year yield, which had averaged 5.93 per cent during April 2020 to
January 2021 surged to 6.13 per cent on February 2, 2021, on the announcement of the market
borrowing programme of the Central Government. Following the announcement of a slew of
measures by the Reserve Bank of India (RBI) on February 5, the benchmark yield eased to 5.96
per cent by February 11, 2021. Thereafter, global spill overs sparked a stampede; by March 5,
2021, the benchmark yield in India had touched 6.23 per cent, but the RBI’s announcements
of large-sized operation twists soothed frayed nerves and settled it at around 6.21 per cent
Annual Report 2020-21 | 187
