People walk outside the North Block which houses India’s Finance Ministry. (Photograph: Prashanth Vishwanathan/Bloomberg)

Budget 2019: Is The 3.4% Fiscal Deficit Target For FY20 Credible?

The Narendra Modi-led administration made a loud pitch for re-election as it announced a farm income support scheme, while also offering tax relief to middle class Indians.

It stepped up spending. It made no announcement to step up revenue collection via any additional taxes being imposed. Yet, it said that its fiscal deficit would remain at 3.4 percent of GDP in FY20.

Is this number credible?

At first glance, it looks like the government is banking on ensuring that revenue growth remains on target in FY20 as against the slippage seen in FY19. On expenditure, while expanding spending for farm support, most expenditure is being kept on a tight reign. Non-tax revenue sources such as divestment and dividends are expected to contribute significantly.

FISCAL DEFICIT

  • In absolute terms, fiscal deficit has risen to Rs 7.04 lakh crore in FY20 compared to Rs 6.34 lakh crore in FY19.
  • As a percentage of GDP, the fiscal deficit will remain unchanged at 3.4 percent.
  • For this, a nominal GDP growth of 11.5 percent has been assumed.

EXPENDITURE: ADDITIONS & CUTS

  • The centre’s total expenditure is projected to rise 13.3 percent to Rs 27.84 lakh crore in FY20. This projected increase is lower than the 14.7 percent increase in FY19.
  • Capital expenditure has been cut by just under 1 percent to Rs 9.53 lakh crore in FY20.
  • The big spending jump has come in the spending on agriculture and allied activities because of the Rs 75,000 crore farm income support scheme (PM Kisan). Spending on agriculture is set at Rs 1.5 lakh crore in FY20 compared to Rs 86,602 crore in FY19.
  • However, spend on rural development, outside the new farm income scheme, is flat
  • There has been no cut in existing subsidies. Food, fertiliser and petroleum subsidies are pegged at Rs 2.96 lakh crore in FY20 compared to the revised estimate of Rs 2.66 lakh crore in FY19.

REVENUE PROJECTIONS: RELIANCE ON DIVIDENDS?

  • Gross tax revenue in FY20 is pegged at Rs 25.5 lakh crore, an increase of 13.8 percent over last year. If you benchmark this to nominal GDP growth of about 12 percent (7-7.5 percent real GDP growth + 4-5 percent inflation), the increase in tax revenues is ambitious but not unachievable.
  • GST revenues, within the gross tax revenue, are pegged at Rs 7.61 lakh crore in FY20, an increase of 18.16 percent. This appears aggressive given that collections in FY19 were at Rs 6.44 lakh crore -- 13.4 percent below estimates.
  • Non-tax revenue is seen at Rs 2.73 lakh crore, an expected increase of 11 percent.
  • Total dividends are pegged at Rs 1.36 lakh crore in FY20, a 14 percent increase over an already elevated dividend collection of Rs 1.19 lakh crore in FY19. This is one head from where additional expenditure will be financed.
  • Dividend from banks, financial institutions and RBI is pegged at Rs 82,911 crore in FY20. Since banks and financial institutions are unlikely to give out large dividends unless their financial position improves significantly, much of this is likely to come from the RBI.
  • Even in FY19, dividends from banks, financial institutions and RBI, jumped to Rs 74,140 crore compared to the budget estimate of Rs 54,817 crore. The RBI had transferred a Rs 40,000 annual dividend in August. Economic Affairs Secretary Subhash Garg said that the government is expecting another Rs 28,000 crore as interim dividend from the RBI. A decision on this is likely to be taken at the next board meeting.
  • From disinvestment, the government hopes to get Rs 90,000 crore in FY20 after collecting Rs 80,000 crore in FY19.

LARGE GROSS BORROWINGS; RELIANCE ON SMALL SAVINGS

  • Gross borrowings for FY20, without buybacks, is pegged at Rs 7.04 lakh crore. This is well ahead of the expected gross borrowings of between Rs 6.25-6.5 lakh crore.
  • The government has tried to reduce the sting in that gross borrowings number by keeping net market borrowings almost flat at Rs 4.48 lakh crore.
  • A large part of this is because the government intends to borrow heavily from the National Small Savings Fund. In FY20, the government has budgeted Rs 1.3 lakh crore in borrowings from NSSF. In FY19, it borrowed Rs 1.25 lakh crore from this pool compared to the budget estimate of Rs 75,000 crore.