Budget 2020 was always going to be a tough ask for the finance minister. For Nirmala Seetharaman it has surely been baptism by fire. The full-fledged budget of July 2019 was nightmarish in terms of the market response to some very controversial announcements like higher public holding, tax on buybacks and higher surcharge on the super rich. To the credit of the finance minister, she managed to douse the anger in the market and more than compensated with a sharp cut in corporate taxes from 30% to 22%. Of course, this would have meant giving up on exemptions and rebates, but for a vast majority of Indian corporates that did not really matter. But Budget 2020 could be a much bigger challenge. Why Budget 2020 could be a real resource test? Typically, finance ministers have leeway on both the revenue and expenditure fronts. They have the choice of either raising the borrowings to spur growth or cutting down on expenditure. Unfortunately, Nirmala Seetharaman can do neither. Too much of a fiscal deficit would upset the applecart in terms of borrowing costs and the external rating of Indian economy. The government has already made peripheral cuts in health and primary education outlays. In a year when the economy is looking up to the FM for infrastructure outlays, capital expenditure cuts could be counterproductive. Here are 8 things you need to know about funding the budget gap? What you need to know about funding the budget gap? Here are eight things you need to know about the likely budget gap and how it could be filled in the budget? a) The GST revenues are likely to be lower by nearly Rs.1.5 trillion as compared to the original estimates in the previous budget. GST collections have taken a hit on account of weak growth, low capacity utilization as well as inadequate compliance. The GST Council has also cut rates during the year and that also contributed to lower revenues. b) There are likely to be direct tax shortfalls this year by at least 12-15% based on the update up to mid January and this is the worst performance in the last decade. Direct tax collections have been hit by lower rates of corporate tax applied and also lower advance tax pay outs this year. That is also a resource constraint. c) Disinvestment revenues could be another big disappointment this year. Against the original target of Rs.105,000 crore, the total divestment collections are less than 20% of the target. Unless the government indulges in some really creative cross holding structures, it is unlikely to get anywhere close to the targets. d) The government got an additional Rs.175,000 crore as a dividend cum special transfer from the RBI. While the merits and demerits of the action can be debated, the government has managed to largely front-end the full capacity of the payout that could come from the RBI. e) One worrying aspect of this Budget 2020 is that the government could rely on off-budget financing to the tune of nearly $28 billion. Off budget is similar to using an SPV structure wherein you avoid taking the debt on your books. For example, even today the government does load its debt on to the books of oil companies and the Food Corporation of India (FCI). This budget, the government could do off-budget financing more aggressively. However, it could be counterproductive as rating agencies and investors view such moves negatively. f) In the previous budget of 2019, the government had mooted the idea of Sovereign Bonds. However, that idea ran into rough weather at the PMO and was almost shelved. This budget may have to seriously look at sovereign bonds to raise funding despite the currency risk. With a forex chest of $465 billion, imports falling more than exports and the rupee predominantly steady, this may be the best opportunity for sovereign bonds. g) The government capacity to invest its own capital in infrastructure projects will be limited and hence may have to look at more of public-private partnerships. However, that would pre-suppose robust debt markets. This budget could see a big focus on creating robust debt markets to galvanize debt fund raising. h) Last, but not the least, the government will look at this budget as an opportunity to widen the fiscal deficit by 50 bps to 3.8%. This clause is available in exceptional conditions and Union Budget 2020 surely offers this route to fill the funding gap.