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22 Feb 2019


We note that the Budget FY20 has cut Capex in the interest of meeting FRBM mandates. The budget appears to be treading a very thin line in making available the requisite resources for total expenditure (including revenue) while maintaining a sustainable fiscal balance. As the fiscal deficit target is pegged at 3.4% this fiscal (as compared to the earlier estimate of 3%), we assess the impact on the Government finances and options that are available at this time.

Starting with the initial budget estimates, it is revealed that the Nominal GDP will be pegged at Rs. 209 lakh crore, growing at 11.2% during the financial year. Growth has been higher than the previous year but lower than expected inflation print has restricted the fiscal arena. As a result, revenue receipts are seen returning Rs. 22.6 lakh crore, which is just over 13.6% more, as compared to the previous year. Revenue receipts are in turn impacted by the foregone revenue in the form of taxes. The GST as well as income tax rationalizations have cut revenue forecasts significantly with Gross Tax Revenue (GTR), taking the biggest hit. Post the devolution to states (as per the 14thFinance Commission mandate), the GTR forms almost 75% of the total revenue receipts of the central Government. Given source’s importance, the less than expected growth (15% Vs. 18.4%, the previous year) is a matter of concern for fiscal planners.

Total expenditure on the other hand is expected to be around Rs. 27.8 lakh crore, which is a growth of about 13%. We note this to be a positive development as the expansion is slower as compared to the previous two years. Revenue expenditure is just over Rs. 24.4 lakh crore and is roughly 87% of total expenditure – this is in line with our overall expectations. At 14%, the category will expand sustainably and is consistent with the five-year growth average.

In addition to losses emanating from tax rationalizations, this year’s Interest Payment obligation are nevertheless creating the imbalances that have us worried. Interest payment obligation will grow at 12.7% this year as compared to the previous year, when it grew by 10.3%. At Rs. 6.75 lakh crore, the category has emerged as one of the largest responsibilities of the central government (28% of revenue expenditure) and by quantum it is reckoned to be highest in five years. Repayments too, have been pegged at Rs. 2.36 lakh crore, which is highest in three years. The growth of 59.5% in the category may mirror the maturity cycle of past market borrowings; This is also suggesting that GOI has chosen to reduce debt rollovers in a bid to contain its fiscal obligations and resultant debt to GDP ratio.

Nevertheless, to compensate for the revenue foregone, Net Issuances are expected to rise by 12.3% - being pegged at Rs. 4.74 lakh crore. We therefore assume that (after considering the number from the previous year) that Government’s loss due to GST and direct tax rationalization is nearly Rs. 50,000 crores. This growth however does not incorporate the incremental Rs. 36,000 crore of market borrowings of FY19, a fact that may tone down our assumption (that however will be clear once the FY19 Actual Estimates are available).

To cope with the restrictive fiscal space, the centre has reduced its Ways and Means Advances (WMA) to states obligation. This is because the centre expects to provide just Rs. 5 lakh crore in FY20 as compared to Rs. 9 lakh crore the previous year. The reduction in Cash Management Bills (CMBs) by almost half augurs the same story as well. Also worth mentioning is the fact that under the entry of ‘Switching’, the quantum has doubled to Rs. 51,000 crores in FY20 as compared to the previous year. What this means is that the Government of India is allowing itself the buffer to convert outstanding long term securities to shorter term and take advantage of the prevailing low inflation/ interest rate environment in order to reduce the debt burden.

We therefore conclude that the fiscal space remains constrained due to lower than expected revenue receipts and higher revenue expenditure (by way of pay commission obligation and tax rationalizations). Given the welfare commitments and the onerous interest servicing, free cash flow has indeed become a problem that can only dealt with by a more robust economic growth, nominally. It must be therefore understood that lower interest rates may have reduced the interest burden but has never the less adversely impacted the GTR. For sustainability’s sake, the centre has contained certain expenditures (especially capital expenditure). However, in a bid to control the FRBM mandates, we note that Government’s role in building the economy is vital at this time and a cut down in capex will be detrimental to the cause. Considering the limitation of resources in a rapidly expanding economy is a reality and we recognize the fact that hard choices have to be made. Having said this, we expect the fiscal deficit containment strategy will provide more gains than compromises in the long run and enough money will be allocated to prominent causes as conditions improve.