Budget 2020: Credibility Of Fiscal Math Depends On Higher Tax Revenue, Divestment Boost
A person uses a calculator. (Photographer: Kiyoshi Ota/Bloomberg)

Budget 2020: Credibility Of Fiscal Math Depends On Higher Tax Revenue, Divestment Boost

The Indian government has stumbled on its path of fiscal consolidation amid weak growth and sluggish increase in tax revenues. In both 2019-20 and 2020-21, the government will veer away from from its preset fiscal road map. It will invoke a rare ‘escape clause’ in India’s fiscal legislation, which allows the government to expand its fiscal deficit by 0.5 percentage points of the GDP.

Like each year, the question being asked is whether the fiscal math is credible.

To assess that, the underlying assumption of nominal GDP growth, the budgeted increase in tax collections and spending must be weighed. Spends kept off-budget such as subsidy payments to Food Corporation of India must also be incorporated to assess the ‘real’ fiscal deficit.

Fiscal Slippage With Deteriorating Fiscal Quality

The government is targeting a fiscal deficit of 3.5 percent for 2020-21 after the budget gap settled at a higher-than-targeted 3.8 percent in 2019-20. With the fiscal slippage, the government has now pushed back the goal of a 3 percent fiscal deficit to beyond 2022-23.

The revenue deficit for FY20 stands at 2.4 percent and is seen widening further to 2.7 percent in FY21.

As such the revenue deficit will be 76.5 percent of fiscal deficit, telling a story of not just fiscal slippage but also the deteriorating quality of fiscal accounts.

The ‘Real’ Fiscal Deficit

Over the past two years, concerns have been raised that the headline fiscal deficit is being understated via the use of extra budgetary resources.

Addressing the concerns over the “real” fiscal deficit, Sitharaman said the central government debt that was not a part of market borrowings and was used to fund expenditure, have been detailed in budget documents.

  • The statement on extra budgetary resources shows an additional spend of Rs 1.73 lakh crore in FY20 as per the revised estimates. For FY21, spending via extra budgetary resources has been pegged at Rs 1.86 lakh crore. The government has included borrowings via fully serviced bonds and the National Small Savings Fund in this.
  • However, the government has mentioned a Rs 64,612 crore recapitalisation of banks via special government bonds separately. If this is also added back to the fiscal deficit, the FY20 fiscal would go up further.
  • The government has also disclosed the amount of unpaid annuity liabilities pending at the end of FY19. This has been pegged at Rs 41,292 crore. The liabilities at the end of FY20 are not disclosed but may have also added to the year’s fiscal deficit.
Similarly, for FY21, the headline fiscal deficit has been pegged at 3.5 percent of GDP, the deficit inclusive of extra budgetary resources, will be close to 4.3 percent of GDP.

Nominal GDP Growth Realistic...

The government has benchmarked its estimates to a nominal GDP growth of 10 percent.

Nominal growth is estimated to have fallen sharply to 7.5 percent in FY20, as per the first advance estimates put out by the government. That includes a real GDP growth of 5 percent. The Economic Survey 2020, presented on Friday, forecast growth of 6-6.5 percent in FY21. The government’s nominal GDP growth projection builds in inflation levels of close to 4 percent, based on India’s flexible inflation target.

The government clears the smell test on the nominal GDP growth estimates it has used to underpin the budget estimates.

But Tax Collection Assumptions Still High...

While the government has made reasonable assumptions on nominal GDP growth, its assumptions on tax revenue are mildly optimistic.

As per the government’s medium term fiscal framework:

  • Gross tax revenue is expected to grow by 12.3 percent in 2021-22 over the revised estimate of 2019-20.
  • Growth in direct taxes is pegged at 13.6 percent.
  • Growth in indirect taxes is pegged at 10.7 percent.
This, according to former Reserve Bank of India governor C. Rangarajan, is ambitious. A tax buoyancy of more than 1 is optimistic, Rangarajan said. Given that, the government may not be able to comfortably meet its fiscal deficit for FY21 either, he added.

Ananth Narayan, associate professor of finance at SP Jain Institute of Management and Research pointed out that the revised estimates for FY20 also look optimistic compared to the actual tax collections numbers put out by the Controller of Government Accounts.

As such, there is a risk that revised estimates would not be met, which would make the budgeted increase look even more unreasonable.

...Government Banking On Record High Disinvestment

The government continues to rely heavily on both divestment proceeds and dividends to meet the fiscal deficit target.

  • The government is hoping to garner a record Rs 2.1 lakh crore from disinvestments.
  • A large chunk of this—Rs 90,000 crore— is expected to come through an initial public offering of Life Insurance Corporation of India and the sale of the government’s residual stake in IDBI Bank Ltd.
  • The government is hoping to garner over Rs 1.55 lakh crore in dividends from the RBI, financial institutions and PSU banks. This includes Rs 65,747 crore from public sector enterprises and another Rs 89,648 crore from RBI and financial institutions.
  • RBI dividend for the year has been budgeted at Rs 60,000 crore.
  • Another Rs 1.33 lakh crore is expected from ‘communication services’, linked to the likely collections from adjusted gross revenue of telecom firms.

Also Read: Winners and Losers: Who Got What in India’s Budget 2020

The key concern here would be the government’s ability to successfully close complex divestment processes for companies like Air India and LIC.

No Great Expenditure Boost

With the economy as weak as it is, government spending could have been an important support. Budget data, however, does not suggest any big on-budget increase in spending.

  • Total expenditure in 2020-21 has been estimated at Rs 30,42,230 crore, reflecting a growth of 12.7 percent over the revised estimate of 2019-20
  • Revenue expenditure is estimated to be Rs 23,49,645 crore in RE 2019-20, which is lower than the budget estimate by Rs 98,136 crore mainly on account of food subsidies, which have been funded through borrowings from the National Small Savings Fund.
  • Revenue expenditure is budgeted at Rs 26,30,145 crore for 2020-21, an increase of 11.9 percent over RE 2019-20. Revenue expenditure is expected to be 87.1 percent of total expenditure.
  • Capital expenditure is budgeted at Rs 4,12,085 crore, reflecting an increase of 18.1 percent over the revised estimate of 2019-20. Capital expenditure as a percentage of GDP is expected to increase by a mere 0.1 percent in 2020-21 to 1.8 percent of GDP.

Also Read: Budget 2020 Highlights: 10 Key Announcements Made By FM Nirmala Sitharaman

The expenditure math suggests continued government support  to the economy but no significant boost from increased spending.

According to Kaushil Das, chief India economist at Deutsche Bank, the government has estimated expenditure at 13.5 percent of GDP, which is higher than the 13 percent of GDP last year. If revenue falls short, which it might, the government may prune expenditure back to 13 percent of GDP.

Worrying Borrowing Profile

For the year, gross borrowings have been pegged at Rs 7.8 lakh crore compared with Rs 7.10 lakh crore in FY20.

  • Net market borrowings are at Rs 5.36 lakh crore in FY21 compared with Rs 4.98 lakh crore in FY20.
  • Borrowings from the small-savings pool remain high at Rs 2.4 lakh crore compared with a revised estimate of Rs 2.4 lakh crore in FY20. In the budget estimate, borrowings from small savings were pegged at Rs 1.3 lakh crore.
Such high borrowings from the pool of small savings can lead to an incentive to keep small savings rates high, which in turn prevents lower interest rates from permeating through the system.
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