If we overlook discussions about the unreliability of data and inaccuracy of growth estimates for the moment, what this means is that the government plans to contain its expenses at a time when private investment is drying up.
The government should have been focusing on counter-cyclical fiscal measures to spur the economy, which were absent during this budget. In a modern market economy, a crucial element of fiscal prudence is counter-cyclicality. This means that governments should save during good times, benefit from higher tax revenues, and work towards building a budget surplus or lowering the deficit. When the economy faces a recession and tax revenues decline, governments should spend more to boost aggregate demand and run down the budget surplus or run a budget deficit. This is a fundamental principle of macroeconomics.
The Union Budget 2019 proposes to stick to the fiscal targets as set under the FRBM Act. Under this, it proposes to achieve the fiscal deficit target of 3.3% in 2019-20 while reaching 3% by 2021-22. Similarly, it also proposes to bring down debt to 48% of GDP in 2019-20 and further down to 44.4% in 2021-22 (inclusive of extra-budgetary receipts).
Now that the government has chosen fiscal discipline over growth-push, will it be able to achieve its target of 3.3%?
What the government plans to accomplish?
- Total earnings: Rs27.4 lakh cr
- Expenditure: Rs27.9 lakh cr in FY2020
- Estimated tax collection: Rs24.6 lakh cr for FY20 (lower by Rs90,936cr from Interim Budget estimates)
- Divestment target: Rs1.05 lakh cr (vs. Rs90,000cr in the interim budget)
- Borrowings: Rs7.1 lakh cr (part of which will be borrowed by issuing overseas bonds)
Are the targets doable?
- If we look at the budget, an expected cut in tax revenues has been offset by higher non-tax revenues and disinvestment proceeds, while the total expenditure allocation is largely unchanged from the level projected in the Interim Budget. The government projected ~24.6 lakh cr tax money collection, which is lower by Rs90,936cr from the Interim Budget estimate. This decline is mainly because of the decline income tax (Rs51,000cr) and GST (Rs97,857cr). To fill this revenue gap, the finance minister has come out with measures like increasing the income tax on the super-rich and extra cess on petrol and diesel along with customs duty hike on various goods. Despite these tax proposals, tax revenue target for FY2020 will be challenging to achieve.
- Prevention of revenue slippage also depends on realization of dividends and surplus from the Reserve Bank of India (RBI), govt-owned banks, financial institutions, and public sector enterprises (PSEs), revenues raised from the telecom sector, and disinvestment proceeds. Total dividends and surplus from RBI, PSU banks and financial institutions and PSEs, has been projected to jump to Rs1.6 lakh cr in FY20 against Rs1.2 lakh cr in FY19 revenue estimates. This too seems to be a bit optimistic given that it is based on a real GDP growth of 7%, especially after India registered a growth rate of 6.8% for FY18-19, its lowest in the past 5 years.
- Further, the government has increased disinvestment target to over Rs1 lakh cr for FY20 from Rs90,000cr estimated in the Interim Budget. This is also 5% higher than Rs80,000cr raised in the previous fiscal. Since a large chunk of its divestment target is met from CPSE-to-CPSE sales, there is a probability that the Centre may realize its divestment target. Its recent CPSE ETF follow-on offer (5) was oversubscribed by more than 5x.
- The Centre’s gross market borrowings are pegged at Rs7.1 lakh cr in FY20, up from Rs5.71 lakh cr last year. In an unexpected announcement in her Budget 2019 speech, FM Nirmala Sitharam said that part of the borrowings will be met by raising funds from overseas markets. The announcement has been subject to much debate and criticism given that this is the first time Indian government will raise funds from the overseas market.
External borrowings- Boon or a bane?
- The government wants to diversify its borrowing, which has so far been limited to the domestic market, and create a benchmark for future bond sales. With global interest rates low and falling, officials see the timing as favorable too. This move aims at reducing public sector borrowings in the domestic market, thus creating space for the private sector.
- Although the step would integrate the Indian economy in global markets, it is debated that there is high risk involved. The interest rate on the coupon depends primarily on India’s sovereign credit rating, external and internal risk factors, and the rates that our peers currently pay.
- Presently, global money markets are inundated with liquidity, which is the reason for many emerging economies’ ability to borrow at low interest rates. Indian government borrows a mere 5% of its GDP in foreign currency, which makes room for the government to borrow more.
- However, borrowing abroad also makes the country far more vulnerable to currency volatility. If the Indian rupee suddenly drops in value because of an unforeseen event, repaying the debt in dollar terms would become much more expensive for the government. Since GoI will have to pay the interest and principal in rupee terms, depreciation against the dollar amounts to an additional interest charge on the loan, for example, if the rupee were to depreciate by 3% post fundraising, and if the interest rate offered was 3.5%, the effective cost would be 6.5%.
- The government will have to be prudent to ensure that external risks are kept to the minimum. Also, it is best if the government thinks of this as a rare instance to take advantage of low global interest-rate levels in a bid to ease pressure of domestic borrowings, and not make this a regular practice.