Budget 2020 India: The GoI’s FY21 expenditure and fiscal deficit projections should adequately reflect the amount required for the NIP for the market to consider them credible.
Union Budget 2020 India: The rolling target included in the Union Budget for FY20 had placed the fiscal deficit for the Government of India (GoI) for FY21 at 3% of GDP. However, it is a foregone conclusion that the upcoming budget is likely to focus on providing some fiscal boost to economic growth. Accordingly, the GoI is now likely to consider a significantly wider fiscal deficit for FY21, compared to the rolling target of 3% of GDP.
ICRA believes that the fiscal boost should be provided through higher expenditure, rather than through a tax cut. In our view, the Union Budget for FY21 should prioritise infrastructure spending, which would boost the core sectors of the economy and create a higher multiplier effect on the economy. Higher capital spending would also help bridge the large infrastructure deficits in some areas, thereby easing logistical challenges faced by various sectors.
Moreover, given the moderate capacity utilisation levels and relatively subdued commodity prices, the inflationary impact of higher capital spending would be limited in the short term. In addition, lower supply-side constraints would help ease inflationary pressures in the medium to longer term.
The recent report by the task force for the National Infrastructure Pipeline (NIP) outlined plans to invest a substantial sum of over Rs 102 lakh crore in various infrastructure projects during FY20-FY25. This report placed the combined investment for FY21 by the Centre, states, and private sector at Rs 19.5 lakh crore. Of this, Rs 4.6 lakh crore would be provided by the GoI through capital outlay in FY21, although the budgetary support from the Centre is meant to be restricted to Rs 1.9 lakh crore. The latter is equivalent to only ~41% of the total infrastructure outlay proposed to be provided by the GoI for FY21, while the financing for the remaining ~59% remains unclear, at present.
The upcoming budget should, therefore, provide clarity on the sources of funding for the project pipeline included in the NIP. The budget estimates (BE) for FY21 for the GoI’s expenditure and fiscal deficit levels should adequately reflect the amount required for NIP for the market to consider them credible, and also clarify the sources of extra-budgetary funding for the Centre’s share of the cost of NIP.
In terms of sectoral allocations, we expect an enhancement in the GoI’s outlay towards sectors such as affordable housing, roads, railways, power, etc, taking a cue from the NIP report. Additionally, a step up in the allocation for NREGA is likely to aid in alleviating rural distress while also leading to asset creation.
Additionally, a higher allocation for NREGA would boost rural consumption demand, which would further support the economy’s growth prospects.
Given that the number of beneficiaries enrolled under PM-Kisan so far are lower than expected, the government could consider increasing the amount of income support per beneficiary. Moreover, some new schemes to support the rural economy and MSMEs, and to support job creation may be announced in the Budget.
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In terms of tax changes, the GoI had already announced a cut in the corporate tax rates in September 2019, the revenue implications of which remain unclear. In light of the latter, ICRA believes that major changes in direct taxes, such as the personal income tax, should not be undertaken in the upcoming Budget. Moreover, after the implementation of the goods and services tax (GST), indirect tax rates on few items remain under the control of the GoI as the GST Council decides on changes in GST rates.
We expect the Union Budget for FY21 to assume a nominal GDP growth of 10-10.5%, relative to the advance estimate of GDP of Rs 204.4 lakh crore made by the Central Statistics Office for FY20. Accordingly, with a modest recovery expected in economic growth, a tax growth of around 10-12% in FY21 is likely to prove realistic.
We estimate that every 10 bps of expansion in the GoI’s fiscal deficit to GDP ratio would allow for extra spending of ~Rs 22,500 crore in FY21. Therefore, if the GoI places its fiscal deficit for FY21 at 3.5% of GDP, this would roughly translate to a fiscal deficit of Rs 7.9 lakh crore in absolute terms.
Overall, the Union Budget for FY21 is likely to focus on providing a fiscal boost to economic growth through enhanced infrastructure spending, particularly for the sectors highlighted in the NIP. Moreover, the central government may announce new schemes, and enhance allocations for existing schemes, to revive rural sentiment and consumption. In our view, further major tax changes should be avoided at this juncture.
Above all, the BE for FY21 for the GoI’s expenditure and fiscal deficit levels should adequately reflect the amount required for the NIP for the market to consider them credible.
The writer is Principal economist, ICRA. Views are personal