Budget 2019: What To Look For In The Fine Print

When Piyush Goyal presents the final budget of the Narendra Modi-led administration, the immediate focus will be on fiscal deficit, the government’s planned borrowings and any large spends or schemes directed at the rural economy.

But it’s the budget fine print that tells you more about the true state of government finances and whether it can make good on its plans. Each year, the relative importance of individual data points changes based on the economic context.

Here are some of the things we are watching this year.

Fiscal Consolidation & Fiscal Quality

Coming after a year of fiscal slippage, the government will likely make all effort to meet its fiscal deficit target. Rating agencies are already cautioning against a second consecutive year of slippage.

• For FY19, the fiscal deficit target is set at 3.3 percent. At most, economists expect a small slip of 10-20 basis points.
• For FY20, the fiscal deficit projection is seen at 3.2-3.3 percent, still some distance away from the long-deferred goal of a 3 percent fiscal deficit.

Beyond the fiscal deficit, economists will watch to see whether the quality of fiscal deficit improves or deteriorates. While the government has decided to stop targeting revenue deficit, most economists continue to believe it's important. At its most basic, running a large revenue deficit suggests that you are borrowing to fund current expenses and not just investments. No one can sustain that for now.

Revenue: Covering The GST Shortfall

As the fiscal progressed, it has become increasingly evident that collections via the goods and services tax are falling short of estimates. Will higher direct tax collections make up for the shortfall? Or will the government push the envelope on non-tax revenue items, for instance, the quantum of dividend it seeks from the Reserve Bank of India.

To judge the government’s revenue performance, look for the following indicators:

• The gross tax revenue budget estimate for FY19 was at Rs 22.71 lakh crore. Does the revised estimate fall short of that?
• What is the estimated growth in tax revenue for FY20? Last year the 16.7 percent growth projected was considered aggressive by economists.
• The non-tax component of revenue will tell you whether divestments fell short of the targeted Rs 80,000 crore. It is likely this target will be missed.
• This could prompt the government to seek a larger interim dividend from the RBI. The budget estimate for dividends from banks, financial institutions and the RBI was pegged at Rs 54,817 crore. The Rs 40,000 crore dividend was transferred in August 2018 and will already be part of this item.

Stepping away from the immediate, economy watchers will judge whether this government’s consistent attempts to push up the tax-to-GDP ratio has borne fruit. The budget estimates suggested that the tax-to-GDP ratio will be above 12 percent this year.

Expenditure: Shifting The Burden?

If the government has been struggling to match its revenue projections, chances are that it will prune and push back expenditure to try and meet its fiscal deficit target.

• Total expenditure was estimated at Rs 24.42 lakh crore in the budget estimates of FY19. The projected 10.1 percent growth was considered modest. If the government fails to meet even this projection, then we know that government support to the economy is waning.
• One expenditure item which often gets manipulated to meet budget deficit targets is subsidies. A drop in the revised estimate compared to the budget estimate of Rs 2.64 lakh crore could suggest rolling over of subsidies.
• Capital expenditure also sees cuts in a year of belt-tightening. Watch to see the extent of shortfall in capital spending compared to the Rs 3 lakh crore budget estimate.
• Over the last few years, we have seen a trend of capex being pushed onto balance sheets of central public sector enterprises. To see if this continued to happen in FY19, look for the funds generated through "Internal and Extra Budgetary Resources".

Borrowings: Increased Reliance On Small Savings

The government started FY19 by projecting gross market borrowings of Rs 6 lakh crore. However, rising yields and concerns about tight liquidity conditions forced it to cut the projected borrowings by Rs 70,000 crore. It said that it would make up for any shortfall by borrowing from the National Small Savings Fund.

• On budget day, watch for the extent of borrowings from this small savings pool. Apart from the central government, agencies like the Food Corporation of India, National Highway Authority of India and Air India have also been borrowing from the NSSF.
• The gross market borrowing amount for FY20 is expected to be in the range of Rs 6.25-6.50 lakh crore. A number within that range may not spook the bond markets.

The Message In the Budget

While the budget data will remain important, it will be the political message that the government sends out through its final document that will be critical. Elections are a few months away, the rural economy is in distress and jobs are hardly abundant.

Will the government feel the need to over-compensate for promises it failed to meet during its term? If so, you may see a headline-grabbing attempt to appease the farm community through some form of income support. If the fear is that the middle class is also disillusioned, then tax reliefs may be on offer.

But then, we will be right back where we started—how will the government balance its budget? A failure to do so will spook markets, rating agencies and investors.

There are no easy choices for the government this year.

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