With the post-election budget set to be presented on 5 July, two key areas of interest will be the credibility of the fiscal deficit targeted by the government, given the recent trend in revenue collections, and whether fiscal space can be created for an expenditure push in light of the dip in economic growth.
The Interim Budget Estimates (IBE) for FY2020 had forecast a rise in the Government of India’s (GoI’s) fiscal deficit at an absolute level to Rs. 7.0 trillion from Rs. 6.3 trillion in the FY2019 revised estimates (RE). However, the provisional data (FY2019 Prov.) released by the Controller General of Accounts (CGA) indicates that the GoI’s fiscal deficit stood at a higher Rs. 6.5 trillion during FY2019, led by a considerable shortfall in tax revenue receipts, the impact of which was partly offset by the curtailment of expenditure below the FY2019 RE level.
As a result, the tax revenue growth implicit in the FY2020 IBE relative to the FY2019 Prov. data, now appears rather steep, at 29.5 percent. Recent trends revealed by the direct and indirect tax collections are decidedly mixed. News reports suggest a surge in advance tax collections in Q1 FY2020, although the sustainability of the same remains unclear given the clouded outlook for economic growth. Moreover, GST inflows continue to trail the monthly average required to meet the FY2020 IBE. This suggests the possibility of a downward revision in the targeted level of tax revenues in the upcoming budget, which would be critical in assessing the credibility of the overall fiscal math.
While the growth estimated by the FY2020 IBE in non-tax revenues is moderate, the surplus to be transferred by the Reserve Bank of India (RBI) would impact the level of the same. The awaited recommendations of the Bimal Jalan Committee, which was appointed to review the economic capital framework for the RBI, with respect to the transfer of the latter’s surplus to the GoI, may crucially influence the government’s collections from this source in the ongoing fiscal.
The target for disinvestment and strategic divestment proceeds was raised to Rs 900 billion in FY2020 IBE from Rs. 850 billion in FY2019 Prov. The latter had benefitted from the inflows of Rs. 145 billion, from the sale of the GoI’s stake in PFC to REC. While the target for disinvestment proceeds for FY2020 may not be changed in the upcoming budget, the achievement of the same would critically depend on how quickly big-ticket strategic and other disinvestment activity commences.
The Ministry of Finance had indicated vide a press release in May 2019, that the allocations presented in the Interim Budget for 2019-20 would largely not be altered. The GoI would only make provisions for additional funds for unavoidable commitments, which had not been fully accounted for in the Interim Budget. This has tempered the expectations of a substantial increase in spending in the upcoming budget.
In our view, few expenditure allocations are likely to change meaningfully in the upcoming Budget, apart from specific items such as certain subsidies, bank recapitalisation etc. There appears to be a backlog of some subsidies at the end of FY2019; the upcoming budget may include additional funds to clear the same. Moreover, Public Sector Banks (PSBs) will require growth capital of around Rs. 350-450 billion during FY2020, in our view, which may be provided in the Budget.
Apart from such items, there is likely to be limited fiscal space for the GoI to provide a push to economic growth in the immediate term through the budget, without risking a substantial increase in the fiscal deficit, unless new revenue streams are introduced. Nevertheless, the government may certainly introduce new policies and reforms to bolster economic growth and aid job creation later in the year.
Given the possibility of a downward revision in the level of tax revenues in the upcoming budget, the fiscal deficit is likely to be higher than the Rs. 7 trillion or 3.4 percent of GDP targeted by the FY2020 IBE, even if the expenditure allocations are not revised upwards by a significant extent. While this may push up yields on government securities (G-sec), the extent of the increase is likely to be contained by the market’s expectations of continued rate cuts by the Monetary Policy Committee of the RBI, open market purchases of G-sec by the Central Bank as well as a decline in global yields if the US Federal Reserve reduces interest rates.
The longer-term glide path for fiscal consolidation for the GoI would become clearer after the recommendations of the Fifteenth Finance Commission (FFC) become available later this year. In particular, this report would influence the magnitude of central transfers to the state governments, which would significantly impact the GoI’s net revenue collections and fiscal balances in the upcoming five-year period.
(The author is principal economist with ICRA)
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Updated Date: Jun 28, 2019 17:59:30 IST