Fudged fiscal figures in budget

K R Sudhaman

It is really unfortunate that after three years of fiscal prudence, the Narendra Modi government has indulged in profligacy in the interim budget 2019, apparently with an eye on general elections in April and May, which is not good for the economy, already witnessing strained macro-economic situation since 2018.
Crisil research is right in saying notwithstanding the low oil prices, which helped government to follow a welcome and prudent fiscal policy in the first three years, Indian economy started slowing down 2018 onwards resulting in tax receipts taking a hit. This led to revenue expenditure overshooting and oil subsidy bill soaring.
Consequently fiscal deficit suffered, slipping 20 basis points to 3.3 per cent of GDP despite a fall in capital expenditure. Now, due to the need to address farm distress and support to middle class, fiscal deficit has been stretched further.
Analysing the fine-print of the please all election budget 2019, Crisil said for fiscal 2020, disinvestments will need to be front-loaded to achieve the ambitious target of Rs 90,000 crore and tax collections aggressively pursued. This will be important to keep the government bond yields in check.
As it is CAG has recently pulled up the government for the poor quality of fiscal deficit. The analysis of fiscal situation in the last few years indicate borrowed money being utilized for revenue expenditure is not good for the economy. Ideally fiscal deficit, which indicated the amount of money borrowed, should fully utilized for capital expenditure to push growth. Using borrowed money for wasteful expenditure like subsidies and consumption expenditure not good for macroeconomic stability.
Another rating agency India Raging and Research (Ind-Ra) too was critical of the fiscal management in the interim budget, which had sops for farmers, middle-class, unorganized labour so as to deal with rural and farm distress ahead of elections.  Some of the initiatives are no doubt welcome and long-awaited but doing them without necessary financial wherewithal is not good.
The revised estimate for Fy19 suggests that fiscal deficit target will once again be missed, though the slippage is of 10 basis points. Ind-Ra believed that that revised fiscal deficit of 3.4 per cent of GDP has an upward bias. Just as Crisil, Ind-Ra felt there will be strain on fiscal deficit if the disinvestment target of Rs 80,000 crore was not achieved.   It also felt articulation of 10-year vision appeared more of a wish list than a concrete long-term plan.
The fiscal arithmetic of the 2019 budget indicated that the nominal GDP growth has been estimated at 11.5 per cent. This looks reasonable but global factors can have a destabilizing impact as witnessed in the current year. The aggregate tax revenue growth estimate of 14.9 per cent in 2019-20 is lower than 19.5 per cent achieved in revised estimates of 2018-19.
“However a closer look at the estimate of various tax revenue components does not inspire confidence. The goods and service tax collection growth iin 2019-20 is estimated 18.2 per cent, whereas the 2018-19 revised estimate growth pegs it at 9.1 per cent. This is a tall order. A slippage of one percentage point in GST growth will wipe off Rs 3.7 billion from the budget estimate,” it said.
Revenue expenditure is budgeted to grow at 14.4 per cent in 2019-20 compared to 13.9 per cent in 2018-19 revised estimates. However the capital expenditure is budgeted to grow at only 6.2 per cent in 2019-20 compared to 20.3 per cent in the revised estimates of 2018-19. This shows that a significant amount of resources has been allocated for various social welfare schemes announced in the interim budget, a departure from the previous budgets. This will also have an implication in the quality of fiscal deficit, which Ind-Ra believes will deteriorate in 2019-20.
Gross borrowing in 2019-20 is budgeted to grow 33.1 per cent as compared to 9.3 per cent in 2018-19. However, net market borrowing is budgeted to grow at 11.9 per cent in 2019-20 as compared 6.2 per cent in 2018-19. A larger market borrowing, besides making Reserve Bank of India’s job difficult, will result in higher bond yield in 2019-20.
Although Ind-Ra believes that the RBI will change its monetary stance to neutral from calibrated tightening in its February 2019 policy review, the dynamics of a rate cut will become a difficult exercise more so under the evolving global situation.
Ind-Ra also felt that besides supporting consumption demand the budget should have also made attempts to promote household savings, which has plummeted to 17,2 per cent in 2017-18 as against 23.6 per cent in 2011-12.
Crisil chief economist D K Joshi said that increase in disposable income for urban and rural India will provide a kicker to consumption demand. Improvement in consumer sentiment will boost demand for low value durables due to additional income of Rs 3000-10,000 in the hands of consumers next fiscal.
On Infrastructure, Crisil COO Amish Mehta said the revised capital outlay for infrastructure for the current fiscal is 11 per cent higher than the budget estimate with civil aviation and power seeing the highest achievement rations. A note of caution is, however, warranted since actual expenditure this fiscal fell short by 10 per cent compared with revised estimates then presented. (IPA)

Monday, 18 February, 2019