Budget 2018: Union budget for FY19, the first after the transition to the goods and services tax (GST), had the unenviable task of boosting spending on various sectors to support economic growth in an uncertain revenue environment, without deviating significantly from the fiscal consolidation path. The introduction of GST has resulted in a situation where a portion of the government’s indirect tax revenues in FY18 would be collected for 11 months instead of 12 months. This, in conjunction with a contraction in non-tax revenues related to dividends from PSUs and the RBI as well as inflows from the telecom sector, have exerted pressure on the overall revenue collections of the government.
However, the revenue situation looks decidedly better in FY19. We estimate that excluding the GST compensation cess, the pace of growth of the gross tax revenues of the government would rise appreciably from 9.8% in FY18 revised estimates (RE) to 15.7% in FY19 budget estimates (BE), benefiting from the expected stabilisation of GST inflows as well as improved compliance following the introduction of the e-way bill. The revenue foregone from direct tax changes is modest relative to the funds collected by way of anti evasion measures. Moreover, the forecast of 11.5% for growth of nominal GDP for FY19 made in the Budget is in line with our expectations.
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Additionally, non tax revenue collections are set to revive in the coming fiscal, albeit growing by a modest 4%. While the target for disinvestment and strategic divestment has been pared to Rs 80,000 crore in FY19 BE from Rs 1 lakh crore in FY18 RE, it may pose a challenge to complete through the market route alone. The Budget has focused on reducing the infrastructure deficits, measures to boost farmer incomes and support the SME sector, and deepening of the social security net. The total capital outlay including internal extra budgetary resources of various ministries is estimated to grow by a robust 20.5% in FY18 revised estimates (RE), followed by a muted 3.8% rise in FY19 budget estimates (BE). However, the outlay for infrastructure is forecast to expand by a healthy 21% in FY2019 BE, which would provide a sustainable boost to economic growth in the coming year. The proposal related to relaxation of the rating threshold would encourage domestic insurance companies and pension funds to invest in bond issuances from the infrastructure sector and also spur municipal corporations to issue bonds, which would help to deepen the bond market.
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Given the disruption to revenues, the government has expectedly indicated a slippage of 30 bps each in its fiscal deficit relative to the previously announced targets for FY18 and FY19. After a pause in the current year, fiscal consolidation is to resume at the earlier pace of 20 bps in FY19. The fiscal slippage, in conjunction with the recent rise in the CPI inflation, resulted in a sharp rise in G-sec yields after the presentation of the Budget. In our view, while the tone of the upcoming monetary policy review is likely to be fairly hawkish, the monetary policy committee may prefer to wait for additional data before hiking policy rates.