On the revenue side, total gross taxes collected by the Centre (before transfer to states) will likely miss BE targets by Rs 4.2 lakh crore.
A shallow recovery seems under way, but bringing growth back towards potential will require continuing policy response. Further monetary easing in the near term is likely to be limited, given the risks of latent inflationary pressures and expectations. Hence, attention has now shifted to the scope for a fiscal stimulus in the FY21 Union Budget. While the FY20 fisc is now mostly of academic interest, insights on the likely contours of the FY20 RE, which will set the base for FY21 growth assumptions, is useful.
First, can the Centre breach (and by how much) the BE fiscal deficit of 3.3%? Both the original FRBM Act and the NK Singh review committee recognised the need for fiscal support during cyclical downturns, and allowed a slippage of 0.5 percentage points, provided real growth in any quarter fell 3 percentage points below the moving average of the preceding four quarters. This would require the Q3 growth to print at 2.5%, since the Q3FY19 to Q2FY20 GDP growth averaged 5.5%. This is unlikely, given our current forecast of Q3 growth (at 4.7%). However, an escape clause allowing slippage in case of structural reforms with unanticipated fiscal consequences might be invoked; the corporation tax cut might be compliant.
Second, the FY20 AE nominal growth forecast pegs GDP at Rs 204.4 lakh crore, versus the BE GDP of Rs 211.1 lakh crore. This lower estimate adds 0.1 percentage point to the RE fiscal deficit to 3.4%. Hence, FRBM will allow an additional gap of about Rs 82,000 crore.
The following is one scenario of likely FY20 Budget RE numbers, based on judgemental extrapolations of the reported April-November trends, with deviations entirely possible, given the complexity. The accompanying chart is a summary of the expected slippages in tax and non-tax revenues and the heads through which some of this can be offset. The net slippage estimated is Rs 80,000 crore, in line with the FRBM leeway.
On the revenue side, total gross taxes collected by the Centre (before transfer to states) will likely miss BE targets by Rs 4.2 lakh crore. Material shortfalls are expected in income tax, excise collections (despite the Rs 2 per litre hike in petrol and diesel taxes), and corporation tax (given the tax rate cut and weak corporate profits). Shortfall of GST balances used by the Centre might be 0.3% of GDP. On non-tax revenues, the expected shortfall from disinvestments is largely matched by higher dividend incomes from RBI and other PSUs.
Part of this gap will be plugged by the 42% (of central taxes collected net of cesses and surcharges) lower required transfer to states, Rs 1.4 lakh crore, meaning the effective shortfall on the Centre’s budget will be limited to Rs 2.8 lakh crore. Albeit in the domain of conjecture and hence probably prudent to consider as contingent, a further potential saving on transfer to states might be an adjustment of excess transfers last year and a lower, more realistic RE estimate for FY20.
Hence, expenditures will have to be suitably moderated by around Rs 2 lakh crore to get a more realistic 0.4-0.5% slippage (taking the effective deficit to 3.8%).
However, expenditure growth over April-November have only slowed very modestly. Media reports suggest that government departments have been asked to cut revenue expenditure in Q4 to 25% of annual budgets (from the 33% normally spent). Even here, the scope for meaningful expenditure cuts remains limited to the PM-KISAN and PMAY schemes (which might be politically difficult), while pensions payouts appear likely to overshoot targets. Lower yields might also allow for some modest savings interest payments. Capital expenditures appear to have limited room for cutbacks.
The most likely modus operandi for spending cuts, it appears, will once again be a transfer of some expenditures to the National Small Savings Fund (NSSF). Given April-November collections in small savings of Rs 1.56 lakh crore, projections for the year are much higher than the FY20 BE of Rs 2.09 lakh crore, probably an extra Rs 50,000 crore. The Food Corporation of India (FCI) is budgeted to pay back Rs 27,000 crore of past borrowings to the NSSF, but it is possible for the NSSF to re-inject around Rs 1 lakh crore back to the FCI as fresh lending, reducing outgoes for food subsidy by around Rs 1 lakh crore. The NSSF can also be used for disbursing funds of around Rs 48,000 crore to other revenue and capital expenditure heads. Recourse to small savings to cut actual government expenditure to this extent is a stretch, but not impossible.
Given these revenue and expenditure changes, the fiscal deficit will slip by around Rs 80,000 crore. This can be financed without recourse to excess G-Sec borrowing: Rs 50,000 crore from cancelling the budgeted buyback of bonds, Rs 20,000 crore additional borrowings from the NSSF, and Rs 10,000 crore additional T-bill issuance.
Looking forward to FY21, projecting nominal GDP growth at 9.4%, and allowing additional buoyancy of 2.5% in most taxes and modest growth in expenditure, the FY21 fiscal deficit can be brought to 3.6% without further increasing off-balance-sheet financing from the NSSF. However, owing to large maturities, the gross G-Sec issuance is likely to be above Rs 8 lakh crore in FY21. This algebra needs to be looked at in greater detail.
(Tanay Dalal contributed to the article.)
The author is senior vice-president, Business and Economic Research, Axis Bank. Views are personal