Union Budget 2019: Moving beyond the immediate positive sentiment surrounding the fiscal deficit, the actual FY20 Budget, however, does a less-than-optimal job on quality of fiscal adjustment
By Shubhada Rao and Vivek Kumar
Union Budget 2019: The economic landscape between the Interim and the Union Budget had grown sombre, with domestic growth losing momentum amidst uncertain global environment. Meanwhile, the strong political mandate had raised hopes of a growth-friendly yet prudent Budget.
At the outset, even as markets were poised for fiscal deficit to remain unchanged at 3.4% of GDP (with a minority expecting a higher deficit), the finance minister surprised pleasantly by displaying her commitment to the revised fiscal glide path and announcing a lower headline deficit target of 3.3%.
With overall market borrowing remaining unchanged, there is likely to be a positive spillover to the rates market, which had started building in fat tail probabilities of higher market borrowing for the current financial year vis-à-vis what was indicated in February’s Interim Budget.
— FM Nirmala Sitharaman announced her intent to issue sovereign bonds for funding some part of the fiscal deficit. While the amount has not been disclosed, the government could test waters and widen the spectrum of market participants. This could be a positive move for the BoP and the rupee;
—Concerns over crowding out of private sector borrowing should recede somewhat with the government lowering the budgetary allocation for bonds/debentures issued by PSEs to 0.8% of GDP in FY20 from 0.9% in FY19 and 1.1% in FY18;
—The medium-term fiscal policy strategy outlines the objective of gradually phasing out of accretions to the EBR (extra budgetary resources) stock, which includes fully serviced G-Secs, to zero from 0.7% in FY20.
Moving beyond the immediate positive sentiment surrounding the fiscal deficit, the actual FY20 Budget, however, does a less-than-optimal job on quality of fiscal adjustment.
The subsidy expenditure is budgeted for an increase to 1.6% of GDP in FY20 from 1% in FY19. In addition, while budgeted capital expenditure has been maintained at 1.6% of GDP, total capex involving PSEs is expected to moderate to 4.2% of GDP in FY20 from 4.8% in FY19 (and its recent peak of 5.1% in FY18).
The inferior quality of fiscal adjustment stems from the introduction of transfer payments (under PM-Kisan) to prop up rural demand in the Interim Budget. Since the Union Budget maintains policy continuity on that front, the revenue expenditure is budgeted for a sharp increase to 11.6% of GDP from 10.6% in FY19.
However, keeping in mind the need for supporting growth drivers within the bounded objective of fiscal rectitude, the Budget introduced a slew of micro-incentives for affordable housing, MSMEs, rural roads, railways, aviation, NBFCs, and farming, besides committing to liberalising foreign direct investment (FDI) in insurance and aviation and providing adequately for PSB recapitalisation.
Overall, this Budget strikes the right cord by attempting to maintain policy continuity while balancing fisc, economic sentiment, growth drivers, and the objective of inclusion.
(Shubhada Rao, Chief Economist and Vivek Kumar, Senior Economist of YES Bank)