Budget 2019: Walking a tightrope

FY20 Interim Budget fiscal deficit estimate of 3.4% untenable: Elara Capital

We believe the government will find it increasingly challenging to retain its fiscal deficit target of 3.4% set out in the Interim Budget for FY20 amid dwindling revenue and competing priorities for government spending. Despite the recent moderation in consumption and continued lackluster investment demand, the government’s ability to pump-prime the economy is contained. However, given government’s ambitious target of making India a USD 5tn economy by 2024, we believe some areas of spending, such as roads, piped water, housing, railways and agriculture, will remain priorities.

Although revenue growth visibility and expenditure compulsion suggest slippages could exceed 50bp, we believe the government will look to limit it to 20bp by budgeting for 5G auction revenue and optimistic revenue projections. As such, we expect the government to report a fiscal deficit target of 3.6% on 5 July 2019E.

Sharp revenue targets in interim budget; downward revision must

The Interim Union Budget had projected sharp revenue targets for FY20. In light of the shortfall in FY19 revenue receipts, projections for FY20 need to be revised down. Against revenue receipts of INR 17.29tn in FY19(RE), the government garnered only INR 15.63tn in FY19(A) as net tax revenue fell short by INR 926bn, primarily led by GST revenue shortfall of INR 600bn. Fiscal deficit of 3.4% was made possible on account of INR 1.32tn cut in total revenue expenditure.

As such, the forthcoming budget may see some downward revision to tax projections for FY20 mainly under the GST head. A part of the shortfall in tax revenue would be made good by accounting for non-tax revenue through 5G auction.

BJP Manifesto to guide new expenditure priorities

The main thrust of Modi 2.0 Budget is expected to be agriculture, MSME and the water sector. We expect the BJP Manifesto to guide new spending priorities. Among key schemes, we expect the government to announce collateral-free loans of up to INR 5mn for entrepreneurs, a scheme for providing short-term agriculture loan of up to 0.1mn at 0% interest rate for a tenure of 1-5 years, sugar subsidy for below poverty line (BPL) families, pension scheme for small & marginal farmers and a revamped scheme for piped water supply to rural households apart from announcement of expansion of Pradhan Mantri Kisan Samman Nidhi Yojana to all farmers. We also expect the government to lay the roadmap towards its INR 100tn infra spending, primarily led by roads, metro, gas grids, water grids and railways.

No change in FY20 borrowing estimates

We expect Centre’s net borrowings to be retained at INR 4.73tn in FY20E, and incremental fiscal deficit to be met through the issuance of treasury bills and small savings fund.

The statistics for the Government to budget for 3.6% fiscal deficit in FY20E, Budget infra spending (FY15-19), India government finances and other info can be refererred in the pdf below: