Budget 2019: Global Brokerages Remain Sceptical Of Government’s Finances

While UBS and HSBC termed the government’s Goods and Service Tax collection estimate for FY20 “optimistic”, a Credit Suisse report said that lower salary hike under the Seventh Pay Commission is likely to provide some fiscal space to the government.

In the interim budget ahead of the general election, the Prime Minister Narendra Modi-led government announced some key proposals ranging from income support scheme for farmers to tax rebate for individuals earning less than Rs 5 lakh a year.

Here are some key takeaways on how global brokerages viewed the interim budget:

Extra-Budgetary Funding Missing The Mark

The government’s extra-budgetary funding for public sector enterprises had shot up to a record high of Rs 1.4 lakh crore last year, according to a Credit Suisse report. Out of the amount, Rs 1.24 lakh crore of the funds have been spent on Food Corporation of India—a state-run company that procures crops from farmers.

Policymakers opted to pause fiscal consolidation with higher spending and tax relief for middle-income earners, said Ridham Desai, managing director and India equity strategist at Morgan Stanley. “We believe that the budget will support consumption and concerns on macro stability should be contained.”

Where Has The Farmer Spent The Incremental Income Previously

A lion’s share of the incremental cash given to farmers is spent on food expenses. The following infographic shows the impact of farm income transfer on their consumption spending pattern. Majority of the rural households spend 59 percent of the incremental consumption on food expenses, the Credit Suisse report said.

“While the downward slide in fiscal deficit has been maintained, consumption stimulus should support growth and its structure reduces the risk of high and sticky inflation,” said Neelkanth Mishra, Indian economist and strategist at Credit Suisse.

Lower Central Pay + Pension = More Fiscal Space?

A lower-than-usual hike in salaries of central government employees under the Seventh Pay Commission is likely to provide some fiscal space, Credit Suisse report said. There was a 7 percent year-on-year growth in the budgeted expenditure for FY20.

GST Collections: Optimistic Projections

The government expects goods and services tax collections to increase by 18 percent year-on-year. The average monthly collection in the current financial year was Rs 97,100 crore, an 11 percent increase from the previous year. “The government estimate seems optimistic unless tax compliance picks up over the coming months,” said a UBS report.

Goldman Sachs, however, echoed concerns over GST collections in the coming financial year.

“The revised estimates for FY19 and targets for FY20 are ‘ambitious’, and would need ‘intensified tax collection efforts, particularly on the GST’,” said Prachi Mishra, managing director and chief India economist at Goldman Sachs.

Government’s Capex Plans

The government’s budgeted capital expenditure “deteriorated” for FY20 in comparison to last year, the UBS report said. Even the government’s off-balance sheet funding by public sector enterprises on capex is estimated to slow down to 2.9 percent of GDP in FY20 versus 3.4 percent in the last year.

UBS said the equity markets reacted positively to the budget and that the “giveaways” will aid both rural and urban consumption. The bond market’s reaction, however, supports the concern of over ambitious revenue assumptions and risk of further fiscal slippage, Gautam Chhaochharia, head of India research at UBS, said. “The budget may help consumption growth, but sustainable macro growth depends more on capex. So, the deceleration in capex growth is worrying, especially as it could be cut even more if revenues disappoint.”

Fiscal Targets Look Tough

While calling India’s election-year budget “a vote for rural income and the middle class”, HSBC Global Research said that some of the targets look tough.

“The new rural direct income support scheme and income tax relief is likely to cost 0.5 percent of GDP. Given no change to the fiscal deficit (3.4 percent in FY20, same as in FY19), how will the 0.5 percent of additional expenditure gets funded,” it asked in the report, adding that the budgeted 18 percent growth of GST revenues in FY20 is ambitious, but not impossible if tax compliance is stepped up.

Gross market borrowing budgeted to rise by 24 percent year-on-year to Rs 7.1 lakh crore is likely to pressure bond yields, the report said.

“Fiscal math is a tad too aggressive due to optimistic assumptions on GST collections and divestments,” said Inderjeet Singh Bhatia, head of research at Macquarie. Two-wheelers, consumption and real estate were the “real winners” of the budget, he said.

Next Move To Watch: RBI MPC Meet

Nomura expects the Reserve Bank of India to view the budget as inflationary and flag it as an “upside risk” to inflation.

“The expansionary fiscal impulse, at the margin, negates the need for the RBI to consider monetary easing at this stage,” said Sonal Verma, managing director and chief India economist at the research firm. She expects the Monetary Policy Committee to vote 5-1 to keep the repo rate unchanged. “We, however, expect the stance to change to ‘neutral’ from ‘calibrated tightening’, reflecting balanced growth/inflation risks.”

The RBI’s Monetary Policy Committee is scheduled to meet on Feb. 7.

JPMorgan said India’s interim budget tries to strike a balance, but the real story is off-balance sheet. “The RBI is a close call next week,” Chief India Economist Sajjid Chinoy said.

CLSA’s India Strategist Mahesh Nandurkar sees a downside risk of Rs 0.6-0.7 lakh crore for FY19 revenue estimates although the fiscal math appears “optimistic”. “A large dividend from the RBI is needed to make the math work.”