The ongoing fiscal year is an unusual one at the macroeconomic level. According to a recent report from Motilal Oswal Financial Services Ltd (MOFSL), net taxes are likely to grow only around 3% compared to the budgeted growth of 25.3%; and divestment proceeds are likely to be 50%-60% of the target, down 30% from FY19. Yet the government’s total receipts are still expected to grow at 6%, primarily helped by unexpectedly large dividends from the Reserve Bank of India (RBI) amounting to ₹1.48 lakh crore.

Nikhil Gupta and Yaswi Agrawal, research analysts at MOFSL, noted in their report that total receipts of the government in the first eight months of the current financial year (April-November 2019), increased by 13%—better than 3.4% a year ago, but short of the 25% growth budgeted in the FY20 Union Budget presented in July 2019.

“Details of total receipts, however, reveal a very interesting insight,” Gupta and Agrawal wrote. While (net) tax receipts increased at a dismal 2.6% over April-November 2019 (versus 4.6% in the same period last year), non-tax revenue receipts (NTRR) increased 68%; last year it was 31%.

“It implies that taxes (which account for nearly 80% of total receipts) contributed only 16% to the total receipts growth (2.1% out of nearly 13% growth), while NTRR accounted for more than four-fifths of the total receipts growth (10.5% out of nearly 13% growth),” the duo highlighted. “Disinvestments, albeit 10% higher than the year-ago period, accounted for only 2% of the total receipts growth in the first eight months of FY20.”

A large part of these NTRR has been the exceptional amount of the RBI’s surpluses transferred to the central government, amounting to ₹1.48 lakh crore (adjusting for the interim dividend of ₹28,000 crore paid in February 2019). “Not only the amount was more than double of the transfers made in any previous year, but also it accounted for as much as about two-thirds of total NTRR this year, much higher than the 50% in FY19 and around 40% in the previous years,” the duo highlighted.

They also noted that massive surplus transfer was not the only way the RBI supported government finances this year. “As the RBI has cut policy interest rates by a cumulative of 135 basis points in 2019, the benchmark bond yield has fallen from 7.5% in March 2019 to 6.6% now, helping the government to save on its interest payments,” Gupta and Agrawal noted.

As a result of rate cuts, interest payments by the government up to November 2019 were only around 52% of the Budget Estimate, the lowest in the past two decades and versus 60.5% a year ago. “Based on the previous years’ data, we believe the government could save around ₹60,000 crore on its interest payments this year,” the duo noted further.

Overall, according to Gupta and Agrawal’s view, it implies that the RBI provided massive support amounting to ₹2.1 lakh crore (or 1.03% of GDP) this year, as against ₹90,000 crore budgeted in July 2019. “Amid very weak tax receipts and shortfall in disinvestments, the RBI’s support helped headline growth (of 12.9%) appear much better than otherwise,” the duo highlighted.

The duo also noted that of late, it is broadly believed that the worst is behind. Quoting Bloomberg’s January survey, where real GDP growth is expected to pick up from 5% in FY20 to 5.9% next year, the duo said the benchmark bond yield is likely to remain around 6.6%.

In the duo’s view, assuming a sharp improvement in tax buoyancy from 0.14 times in FY20 to 1.08 times in FY21, net tax receipts could increase 10% annually next year, from the expected growth of around 3% this year. “This is assuming that 35.5% of central taxes are devolved to the states, much higher than an unrealistic assumption of 33% in the July 2019 Union Budget and similar to the devolution rate in the previous years,” they said in the note.

Additionally, in the duo’s view, notwithstanding much higher growth in taxes and non-debt capital receipts, the RBI will be unable to support the government’s finances in FY21 as much as it has this year. They flagged three reasons for this.

One, in sharp contrast to FY20, as against an average liquidity adjustment facility (LAF) deficit of ₹45,900 crore last year (July 2018–June 2019) on which the RBI earned (at repo rate) and paid to the government, there was an average surplus of ₹1.9 lakh crore so far (July 2019-January 2020) under the LAF window. “It implies that the RBI has paid to the banks this year, and thus, the surplus transfer to the government will be lower to that extent,” the duo noted.

Second, due to the massive receipts crunch this year, it is largely believed that the RBI could decide to provide another interim dividend of ₹30,000 crore or so to the government before March-end. “While it will help this year, it also implies a lower transfer next year,” the duo highlighted.

And, third, since the analyst duo believe that there will be no more rate cuts in 2020, the government is unlikely to save unexpectedly on its interest payments next year. Against these limitations, India has added significantly to its foreign exchange reserves this year—close to $32 billion since June 2019. “However, the gains on this account are unlikely to be massive because the rupee has been broadly stable this year,” the duo highlighted further.

“Therefore, notwithstanding expectations of better GDP growth next year, total receipts could grow slowly at only around 4% annually in FY21 versus the 6% growth this year,” the duo pointed out. “Assuming an unchanged fiscal deficit of 3.5% of GDP, spending growth would also be slightly lower at 6.6% next year, compared to 7% this year,” they added.

Come February 1, finance minister Nirmala Sitharaman has a tight rope to walk, as FY21 is going to be more challenging to manoeuvre—that, too, without RBI’s fulsome hand-holding.

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