The ability to stick to fiscal deficit targets, or the extent of slippage, the realism of revenue and expenditure assumptions and the size of the planned market borrowings for FY20 would be the key areas of interest.
By Anjan Deb Ghosh
The government’s interim budget will be presented against the backdrop of several challenges confronting the economy; additionally, there is a distinct possibility of a slippage in the fiscal deficit for FY19 given the shortfall in indirect tax collections and disinvestment receipts—at least until now.
There is a high likelihood that the fiscal deficit of 3.3% budgeted for FY19 would not be met, even after factoring in the reliance on off-balance sheet funding and the likely roll-over for some of the food and fertiliser subsidies. Consequently, we see limited scope for fiscal consolidation in FY20 as well; while the fiscal deficit target had been set at 3.1% of the GDP for FY20 in the Union Budget of FY19, we expect it to be higher at around 3.3% of GDP. Along with a nominal GDP growth of 11.5%, this would roughly translate into `6.9 trillion of deficit in absolute terms. Against this, as repayments falling due in the coming year are `2.5 trillion in FY20 (`1.6 trillion in FY19), market participants will assess the size of the planned market borrowings for FY20, which, along with RBI’s monetary stance, would give a sense on the direction in the movement of bond yields.
We do not expect any major changes in indirect tax rates in the interim budget for FY20; in any case, after the implementation of GST, it’s the GST Council that decides GST rates for most items. Also, customs duty has been raised on several items post the Union Budget last year. We do not expect reversal of excise duty cut on fuels that was effected late last year. However, minor changes could be possible in personal income tax rates/slabs, which may provide a mild support to consumption.
Farm sector and thereby rural distress is a continuing concern, and to mitigate the same, the government is likely to increase allocations for existing schemes like MGNREGA, Ayushman Bharat, etc, which could result in shifting capital resources from developmental infrastructure to rural spending programmes. Also, there is great anticipation that the government may come up with some sort of income transfer/direct farmer support scheme to support the rural poor. If that were to happen, the manner in which the fiscal space would be created to fund such schemes—without compromising on capital spend—would be keenly watched.
As has been the trend for the last few years, ICRA expects the interim budget to increase the capital outlay towards infrastructure sector significantly. A major part of this capital outlay is expected to be budgeted towards roads and railways. Dedicated allocations for specified large infrastructure projects announced, such as Bharatmala and Sagarmala, are likely to be made to expedite these projects. While the pipeline of projects to be awarded in these sectors remains strong, an increase in budgeted capital outlay will enhance visibility of conversion of the projects planned. While the expenditure on national highway development has increased significantly over the last 3-4 years, a major part of it has been funded by Internal and Extra Budgetary Resources (IEBR). An increased budgetary allocation will lower the dependence on IEBR and can support faster pace of highway development.
Apart from the core railways, and roads, the special focus of this budget is expected on the development of rural infrastructure like rural roads and rural housing. To meet the government’s target of Housing for All by 2022, the budget is expected to announce an increase in PMAY (Rural) outlay for supporting construction of houses in rural areas. Similarly, capital outlay under PMAY (Urban), which includes assistance for constructing homes in urban areas, is also expected to be increased.
To benefit the weaker sections of the society at large and in line with past trends, we expect the target for institutional credit for agricultural sector will be increased. Similarly, for increasing credit supply to micro, small and medium enterprises (MSMEs), the refinancing target by the Micro Units Development and Refinance Agency Bank is expected to increase. As regards capital requirements for banks, the government has recently upsized the recapitalisation package by `410 billion for PSBs to `1.06 trillion for FY19 (Rs 900 billion in FY18). While we expect capital requirements for PSBs to remain sizeable at over Rs 500 billion during FY20 to support about 10% credit growth, the budgetary allocation is expected to be lower than requirement on the back of expectations that PSBs may be able to raise some capital from the markets as earnings profile shows signs of improvement.
Overall, the interim budget is likely to introduce limited tax changes. The ability to stick to fiscal deficit targets, or the extent of slippage, the realism of revenue and expenditure assumptions and the size of the planned market borrowings for FY20 would be the key areas of interest.
The author is chief rating officer, ICRA