Budget 2020: Amid tax collection fall, will govt cut spending to check fiscal slip? Aditi Nayar tells

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Published: December 30, 2019 1:32:36 PM

Budget 2020-21: The non-tax revenue could see a boost if the payments related to the AGR dues are received by the government within the stipulated time, Aditi Nayar said.

Budget 2020, Union Budget 2020 India, Budget 2020 India, nirmala sitharaman, Budget 2020-21Union Budget 2020 India: The GDP growth may see an improvement to around 6.3 per cent in FY2021 as against 5.3 per cent in FY2020, Aditi Nayar said.

Budget 2020 India: Amid weak tax collection and limited clarity over the completion of disinvestment target, the government is expected to take an expenditure cut to prevent a fiscal slippage from the budgeted target for FY20, said an economist. However, non-tax revenue could see a boost if the payments related to the AGR dues are received by the government within the stipulated time along with the transfers from the RBI, Aditi Nayar, Principal Economist, ICRA told Ashish Pandey of Financial Express Online. Finance Minister Nirmala Sitharaman is expected to present the budget on February 1, 2020. On likely recovery in the economy, Aditi Nayar told Financial Express Online that the GDP growth may see an improvement to around 6.3 per cent in FY2021 as against 5.3 per cent in FY2020.

Here are edited excerpts of the interview:

Do you think the government will be able to contain fiscal deficit at the budgeted target?

Tax revenues have reported a subdued performance in the recent months, and the outlook for economic growth in H2 FY2020 remains mixed. Taking into account the anticipated impact of the cut in corporate tax rates, a portion of which would be shared by the states, we estimate the net Central tax shortfall at Rs. 1.0-1.7 trillion in FY2020 relative to the budgeted level. This would be partly offset by the transfers from the RBI, which are higher than budgeted by around Rs. 0.6 trillion.

It remains unclear whether the targeted disinvestment in all identified entities would be completed during FY2020, and whether the GoI would meet its disinvestment target for this fiscal. However, if the payments related to AGR dues are received by the Government of India (GoI) from various license holders within the 90 days stipulated by the Supreme Court, there could be a sizable upside to its non-tax revenues relative to the FY2020 budgeted amount. Overall, expenditure cuts may have to be undertaken to prevent a fiscal slippage in FY2020.

When do you see the economy recovering? Will GDP growth continue to remain weak even in 2020?

As we had expected, the early data for November 2019 has provided a glimmer of hope that the economic growth may have bottomed out. As many as 15 of the 18 lead indicators that we track have reported a pickup in growth or narrower contraction in November 2019 in sequential terms. However, this is partly on account of a favourable base effect. Given the sharp base effects driven by the earlier onset of the festive season in 2019 relative to 2018, we think it is more constructive to assess the average growth performance of various indicators for October-November 2019.

As many as 11 of the 16 non-financial indicators, recorded an improvement in these two months relative to their YoY performance in Q2 FY2020. Overall, we are cautiously optimistic of a pickup in the real GVA and GDP growth in Q3 FY2020 from 4.3% and 4.5%, respectively, in Q2 FY2020. Revenue considerations will dictate the extent to which government expenditure will need to be squeezed in Q4 FY2020. This will crucially influence whether a recovery in economic growth momentum can sustain in that quarter.

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In FY2021, the monsoon and broader economic sentiment will drive consumption trends. A broad-based pickup in private sector capacity expansion is likely to set in only after there is clear visibility of a sustained improvement in demand. One final rate cut of 25 bps may be forthcoming in Q1 FY2021, if inflation appears to be on track to revert to the mid-point of the MPC’s medium-term target of 4%. Export growth may improve modestly from the tepid performance in FY2020. Government spending at the Central and State level will remain a crucial driver of economic growth. At present, we expect the GDP growth may improve to around 6.3% in FY2021 from 5.3% in FY2020.

What is the option before the RBI as food inflation raises its head? Will the central bank go for rate cuts in 2020?

While the improvement in rabi sowing is encouraging, the food inflation is expected to remain elevated in December 2019. Subsequently, it would ease substantially in January 2020 as vegetable prices normalise. The core-CPI inflation (excluding food and beverages, fuel and light, as well as petrol and diesel for vehicles) stood at a modest 3.6% in November 2019. However, we are apprehensive that the revision in telecom tariffs is likely to considerably push up the core-CPI inflation in December 2019.

Overall, the headline CPI inflation could harden further to 5.8-6.0% this month, close to the upper threshold of the Monetary Policy Committee’s (MPC’s) medium-term target of 2-6%. As a result, there appears to be a high likelihood of another pause in the February 2020 policy review. The MPC may subsequently reduce the repo rate by a final 25 bps, but only once there is clarity that the headline CPI inflation will sustain below 4%.

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