Budget 2019: Fiscal Challenges Abound As Nirmala Sitharaman Presents Her First Budget

Finance Minister Nirmala Sitharaman will present her first budget this week amid continuing concerns about the state of the economy and of government finances.

The Bharatiya Janata Party-led government, which had succeeded in bringing down the central government fiscal deficit in the early years of its first term, has missed targets for the last two years. It pegged the fiscal deficit for FY20 at 3.4 percent of GDP in the interim budget presented in February.

Should the government retain that target in the final budget presented this Friday, it will find that the path to meet that target has become even more challenging than it was in February. Revenue growth has fallen short of expectations while expenditure commitments have only risen.

The Revenue Math

When the government presented the interim budget, it had projected a 14.3 percent increase in revenue receipts in FY20 over the revised estimates for FY19. Within that, the government had budgeted for a 14.8 percent increase in net tax revenues in FY20 compared to the estimated collections in FY19.

Since February, data from the Comptroller General Of Accounts shows that tax revenue collections fell below the government’s revised estimates, pulling down total revenue collections as well.

Revenue collections in FY19 stood at Rs 15.6 lakh crore, 9.6 percent lower than the revised estimates of Rs 17.3 lakh crore. Tax revenue stood at Rs 13.17 lakh crore, nearly 11 percent below the revised estimates.

As such, if the government were to hold on to the revenue estimates presented in the interim budget, it would have to attempt a 26 percent increase in total revenue and a 29 percent increase in net tax revenues.

Given the backdrop of subdued nominal GDP growth growth, where both growth and inflation are lower, this seems difficult to achieve.

The FY20 fiscal math looks daunting, said Indranil Pan and Gaurav Sen Gupta, economists at IDFC Economic Research in a note dated June 26.

In order to compensate for lower tax revenue collections, the government may seek to push up collections from non-tax revenues.

With no clarity on any one-time dividend transfer from the Reserve Bank of India, the market will be watching to see how much the government budgets from collections via dividends. “There is now a lower assurance for any amounts that can be used under this count for FY20 budget, as this report will now be tabled after the Budget announcement on 5 July,” said IDFC Economic Research.

Increased collections from disinvestment may also be sought to make up for lower tax revenues.

The Expenditure Math

Meanwhile, the government may try to maintain expenditure across key schemes to avoid hurting the economy further.

Typically, in the year post an election, governments tend to tighten expenditure to make up for spending in the lead up to elections. This time, however, a slowdown in the economy may prevent such austerity.

In the interim budget, the centre’s total expenditure was projected to rise 13.3 percent to Rs 27.84 lakh crore in FY20. This projected increase was already lower than the 14.7 percent increase in FY19.

A large chunk of the expenditure increase was on account of the PM Kisan speech, which was expected to cost Rs 75,000 crore in FY20. Following the elections, the government expanded the scheme to cover all farmers, adding another Rs 13,000 crore in spending on account of these cash transfers.

With limited increase budgeted for other key schemes and items, the government may find it difficult to reduce expenditure unless it takes tough decisions including a cut-back in some existing subsidy schemes.

Central government expenditure is expected to rise to 12.5 percent of the GDP in FY20 from 12.2 percent in FY19, mainly because of the PM-Kisan scheme which entails a cost of 0.4 percent to the GDP, said Morgan Stanley economist Upasna Chachra in a note dated June 27.

The government is also likely to keep off-budget spending high, say economists.

In FY19, internal and extra-budgetary resources rose to Rs 5.58 lakh crore compared to the budget estimate of Rs 3.84 lakh crore. The interim budget pegged resources raised through this category at Rs 5.23 lakh crore in FY20. Internal and extra budgetary resources include funds raised by government agencies and companies, including the National Highway Authority of India and the Food Corporation of India.

The increase in borrowings by FCI, in particular, has raised eyebrows since it suggests a delay in subsidy payments. Data released by Controller General of Accounts shows that even in FY19, total subsidy payments were only 74 percent of the budget estimate, suggesting some deferral of subsidy payments.

“We expect capital expenditure to remain steady as a percentage of GDP. The government is likely to continue with the off-budget route for carrying out infra-related spending,” Morgan Stanley said in its note.

Should The Government Target A Higher Deficit?

Some economists believe the government could consider a wider fiscal deficit in order to support the economy amid a downturn.

Morgan Stanley expects the central government’s fiscal deficit at 3.5 percent of the GDP in FY2020.

“Given lower tax revenues, we see high probability of fiscal slippage if the government does not reduce expenditure or explore further sources of receipts,” said Kotak Institutional Equities.

We believe the budget could be fiscally more aggressive than the status quo 3.4 percent deficit expectation and more spend oriented, added Edelweiss in its note.