Be rational, don’t expect a lot from the full budget…

The market has very high expectations from the first budget of the new government. However, we feel that the actual outcome may not be exciting. Before getting into the details here are the key highlights of the interim budget presented in February 2019. It was prepared considering the fading fiscal position and upcoming election. The fiscal target was marginally diluted to 3.4% from 3.3% in FY19 due to increase in total expenditure and is maintained at 3.4% for FY20 forecasting a 15% growth in tax revenue. This was better than anticipated by the market given the risk of populist measures the government could be inclined to offer. SOPs were given to small and vulnerable farmers with direct cash benefit of Rs6,000 per annum, at a total cost of Rs20,000cr and Rs75,000cr built in for FY19 and FY20, lower than being feared by the market. Concession were provided for salaried middle class by cutting their applicable tax rate to zero for taxable income up to Rs5lac. And in-terms of expenditure the focus was more on social segments like food, agriculture and welfare while total borrowing was maintained flat from FY18 to FY20.

Overall, it was a good budget considering that tax revenue will revert soon. But based on the latest provisional fiscal data for FY19, tax revenue is hugely short by Rs1.67 lac cr than projected, a growth of only 6% YoY compared to the anticipated 19%. But, the government managed to meet the fiscal target of 3.4% by sharp compression in spending to Rs23.1 lac cr from the projected Rs24.6lac cr. According to the Controller General of Accounts, only 60% of the food subsidy allocation was used in FY19. Having missed the total tax revenue by a huge margin, the current target for 2019-20 looks too steep and unattainable at 29.5% up on YoY basis. The government has also committed Rs750 bn to PM-Kisan support scheme and direct tax concession. The government has been relying heavily on off-balance sheet financing, particularly for its subsidies in the last three years. FCI’s borrowings from the National Small Saving Fund now stand at Rs 1.86lac cr. In 2018-19, the government also postponed its fertiliser and oil subsidy payments, pushing the total subsidy arrears inheritance of the next government.

The Indian economy opened fiscal year 2019-20 on a weak note on the external front. The YoY export growth dropped to a meager 0.6% in April. A continued rise in gold and crude oil import bill resulted in trade deficit climbing to a five month high of USD 15.3 billion. Going forward, export growth is likely to remain subdued, owing to slowing global economy and unresolved trade-war. Given the weak fiscal situation the bandwidth of the new Finance Minister to boost growth and new investment through stimulus seems limited. We believe that the government may have to relax its fiscal deficit target for 2019-20. Additional growth can be triggered only by relaxing the fiscal target in the short-term, off-balance sheet financing, export schemes, industry concessions, correcting the ongoing liquidity issue and easing monetary policy. If the fiscal level is maintained at 3.4% then the growth of the domestic economy will be moderate for the time being which has fallen to a five year low of 5.8% in Q4FY19. The market’s hope is very peculiar this time, as it wants growth while maintaining the fiscal prudence. It is going to be a big challenge for the new finance minister to manage the overall requirements of the economy to boost consumption, increase private and government spending (Infrastructure).

Posted: June 13, 2019