Budget 2020-21: There is immense noise around I-T cut in the Budget. Notably, the I-T multiplier remains around (-)1, indicating limited effectiveness of I-T cuts.
By Upasna Bhardwaj
Union Budget 2020 India: On the heels of Union Budget 2020, expectations are building up as to what the government can, should or should not do to kick-start the economy. The fiscal situation of the government is fragile, as the economic slowdown trend became more pronounced in FY20. The gap between FY20 budget estimates and actuals has been widening across all tax categories. Divestment estimates too seem to be falling apart with few big-ticket asset sales likely to be postponed. Despite the windfall from RBI dividend and inclusion of interim dividend, we expect about 1% shortfall in total receipts from the Centre’s budgeted estimates. Nominal GDP assumptions will also lead to about 10bps slippage.
As per FRBM Act, the government can invoke an escape clause for fiscal slippage up to 0.5% of GDP in special circumstances. We believe the government will invoke this and deliver FY20 fiscal deficit closer to 3.8% of GDP, curtailing/postponing expenditure by Rs 1.2 lakh crore. We then expect FY21 fiscal deficit announcement to be around 3.5% of GDP (gross borrowing could be announced a tad below Rs 8 lakh crore). The government will also review the roadmap towards achieving fiscal deficit of 3.3% in FY22, 3.1% in FY23 and 3% in FY24.
There is immense noise around I-T cut in the Budget. Notably, the I-T multiplier remains around (-)1, indicating limited effectiveness of I-T cuts. However, weak demand conditions and lack of confidence may prompt the government to tweak some slabs/rates.
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The shortfall arising from increased spending on infrastructure and the revenue shortfall from I-T tweaks could partly be met through aggressive privatisation drive. The government will aim to complete the on-going privatisation of Air India, BPCL and CCRI in FY21. We expect Rs 1.1 lakh crore of divestment revenues in FY21.
Finally, the government should aim to provide credible budget numbers, even if it involves deviating briefly from fiscal consolidation path. The consistently widening gap between the budget estimates and actuals has led to significant volatility in the bond market. Greater transparency and credible fiscal conditions would lay the ground for inclusion of India in the global bond index, easing supply concerns and aiding smoother transmission.
The author is an economist at Kotak Mahindra Bank