Budget 2020-21: The revised estimates for FY20 assume a dramatic rise in tax growth in the last quarter of the fiscal year. Income
By Pranjul Bhandari
Budget 2020-21: As expected, the government missed the fiscal deficit targets for both FY20 and FY21, posting a deficit of 3.8% of GDP for FY20, versus the budgeted target of 3.3% of GDP ; and, a fiscal deficit of 3.5% of GDP for FY21, versus a target of 3% announced earlier.
The miss in both the years is not likely to raise eyebrows because a 0.5% of GDP slippage is allowed under the FRBM fiscal rules during special situations (e.g. when structural reforms have unanticipated fiscal implications). The central government now expects the fiscal deficit to consolidate at a slower pace than before, going to 3.3% of GDP in FY22, versus 3% earlier.
The 0.5% of GDP slippage is not where it ends. Over the last few years, some on-budget expenditures have been pushed off-budget. To be fair, for the first time, the government has provided a list of these ‘extra budgetary and other resources’, namely, National Small Savings Fund (NSSF) loans to select PSEs, government fully serviced bonds, and bank recapitalisation bonds. Adding these to the on-budget fiscal deficit shows that the ‘true’ fiscal deficit is at 4.9% of GDP in FY20, and 4.4% of GDP in FY21. Moreover, we find that once we add the state government fiscal deficit and PSE borrowings from all sources (and not just the NSSF), the overall public sector borrowing comes in at an elevated 9.3% of GDP in FY20.
The nominal GDP growth expectation for both FY20 and FY21 seems broadly reasonable at 7.5% and 10%, respectively.
However, there are other niggling worries. The revised estimates for FY20 assume a dramatic rise in tax growth in the last quarter of the fiscal year. Income tax receipts are expected by the government to grow by a significant 52% y-o-y in the last quarter of the year, versus 6% in the first three quarters. Receipts from a new amnesty scheme may help here, but its impact is not certain. Similar ambitious assumptions for customs and excise duties exist. If the actuals come in lower, the growth required will become rather large.
For FY21, the tax buoyancy is budgeted at 1.2 (12% y-o-y growth in gross tax revenues). The growth assumptions for income tax may be high (at 14%), but the assumption for goods and services tax (GST) revenues may be achievable if compliance improves. The government is assuming a GST monthly collection rate of Rs 1.17 lakh crore per month in FY21, versus Rs 1.03 lakh crore in FY20.
Furthermore, the estimate for disinvestment and spectrum receipts also assumes a large increase (at 15% of total revenues in FY21, versus 6% in FY20). On expenditure, a 0.3% of GDP increase in FY21 is divided between current expenditure (0.2% of GDP) and capex (0.1% of GDP). Overall, the budget depends heavily on non-tax revenues, for both funding its expenditure and the FY21 fiscal consolidation. With much of this depending on market conditions, the fiscal situation may remain tight.
Capex, especially non-defence capex, is budgeted to rise as a percentage of GDP. Details suggest a gentle increase across many subsectors (telecom, roads, urban development, etc), rather than a concerted push to any one sector.
Some other policies for the infrastructure sector are also likely to be supportive over the medium term. These include tax relief to Sovereign Wealth Funds investing in infra companies and incentives for the domestic municipal bond market to take off.
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Collating all expenditures in rural India, we find the thrust to remain unchanged as a percentage of GDP. Within that, the share of the cash transfer schemes, NREGA and PM Kisan, are also likely to remain unchanged at 0.3% of GDP each.
Positive for growth if asset sales take off: At first glance, it may seem that a fall in the fiscal deficit in FY21 will impart a negative fiscal impulse. But if a large proportion of revenues comes from asset sales, as is budgeted, the growth impulse may turn positive. If the entire Rs 2.1 lakh crore disinvestment target is met, there could be a 0.4% of GDP positive fiscal impulse (assuming a fiscal multiplier of 1).
The government stuck to its plan of Rs 4.7 lakh crore of net market borrowings in FY20. In a year when the fiscal deficit came in higher than budgeted, this was made possible by cancelling buybacks and relying more on the NSSF.
For FY21, while the growth in gross market borrowing is 10% y-o-y, in line with the nominal GDP growth assumption and market expectations, the growth in net market borrowing including buybacks is a tad higher, at 15% y-o-y.
Expected rate cut in June: As a new vegetable crop arrives in the market, inflation may fall from 7.4% in January, to 4.5% by mid-2020. While this will be above the 4% inflation target, we expect the RBI to prioritise growth, and given our expectation of a prolonged negative output gap, cut rates by a final 25bp in the June meeting, taking the repo rate to 4.9%.
Personal income tax slabs have been cut sharply across the middle-income categories. It will only be applicable to taxpayers who forego all other exemptions and deductions. Some 70 deductions would have to be foregone, and it is not clear how many taxpayers will move to the new regime. The option to stay under the old regime will remain. The government is assuming a revenue loss of Rs 40,000 crore. The coexistence of two systems may become a bit complicated and implication will be difficult to predict.
The corporates will no longer have to pay DDT. It will instead become taxed in the hands of the shareholders. The overall loss from this move is likely to be Rs 25,000 crore, according to the government.
The government levied a new tax (TDS) on e-commerce transactions. Some changes in residency rules, and thereby tax incidence, have also been announced. An import tariff can act like an export tax. It could get in the way of India integrating into global supply chains.
Efforts to attract foreign inflows: The government has taken steps to attract foreign inflows. Corporate bond FPI limits have been raised from 9% outstanding, to 15% outstanding. Having said that, this may not be taken up immediately.
Non resident investors will now be allowed to invest in specific government bonds. SWFs may not have to pay tax on dividend/interest income for investments in domestic infra companies.
After all, the demand side push from the budget (via personal income tax cuts and increased infrastructure spending) at the same time as improving monetary transmission of earlier rate cuts, points to a wider current account deficit ahead. HSBC forecasts India’s current account deficit at 1.7% of GDP (FY21), slightly higher than that of 1.2% of GDP. The measures announced in the budget may not lead to higher capital inflows. Changes related to debt quota for foreign investments in corporate bonds and allowing full access for nonresident Indians in certain government securities may not be sufficient enough to change investor sentiment for the better. The uncertainty around the tax policies related to long-term capital gains (LTCG) tax and the budget metrics will remain a cause of concern.
Government bonds to outperform swaps. Gsecs are likely to see a temporary relief rally in the initial response. Following the budget, the focus will be on MPC.
Co-authored with Aayushi Chaudhary, Economist, HSBC Securities and Capital Markets (India) Pvt Ltd
Edited excerpts from India Budget 2020, HSBC Global Research
Bhandari is chief economist HSBC Securities and Capital Markets (India) Private Limited