Fiscal Profligacy

When the government was drafting this years Budget, it seems the only thing it had in mind was elections later this year. No wonder then that when the interim Finance Minister, Piyush Goyal, unpacked his customary Budget suitcase, it had many goodies for the common man, farmers and workers in unorganised sectors.

In what some of the critics called the cash-for-vote Budget, the government seems to have thrown fiscal prudence to the winds. In announcing a direct benefit transfer scheme for farmers - under which it plans to give Rs 6,000 every year to 120 million farmers with landholding of less than 2 hectares - the government took an additional financial burden of Rs 75,000 crore in the next financial year. Since the scheme has been made effective retrospectively, from January 1, 2019, a provision of Rs 21,100 crore has been made in the current financial year as well.

In yet another 'popular' announcement, the government plans to exempt individuals with up to Rs 5 lakh taxable income from income tax. This would benefit 30 million taxpayers, and by the finance minister's own admission, cost the exchequer around Rs 18,500 crore.

Then there's another big announcement - the Pradhan Mantri Shram-Yogi Maandhan pension scheme for unorganised sector workers with monthly income up to Rs 15,000. It aims to provide an assured monthly pension of Rs 3,000 on monthly contribution of a small amount while they are working. While the full cost of the scheme is yet to be known, the government has allocated Rs 500 crore, promising to contribute more as and when needed.

These three alone could account for an additional Rs 1 lakh crore spending in the next financial year, not to forget that some of the promises the government made last year (like the Ayushman Bharat health insurance scheme) had not been fully provided for in the last Budget. Some costs of existing schemes are likely to be carried forward to next year.

Meanwhile, the total expenditure in 2019/20 is estimated to rise by Rs 3.3 lakh crore, or 13.3 per cent, from the revised estimate this year.

With the fiscal deficit target of 3.4 per cent of the GDP, which in itself looks ambitious, for the next year, the question that is haunting economists and policy makers is if the government has enough resources to provide for all its ambitious social sector schemes as well as infrastructure projects.

Revenue Outlook

The government has set a rather ambitious revenue target for the next fiscal. The total revenue (tax, non-tax and non-debt capital receipts) has been estimated to grow 14.5 per cent to Rs 19.77 lakh crore from the revised estimate of Rs 17.29 lakh crore for the current year. This includes 15 per cent growth in tax revenue (Rs 17.05 lakh crore) and 11 per cent in non-tax revenue (Rs 2.72 lakh crore). The government also expects a 12.5 per cent rise in income from disinvestments to Rs 90,000 crore. It looks like the government has over-estimated revenues from all the three sources. Though growth in revenue from taxes has been moderated to 15 per cent in 2019/20 from 19.5 per cent in the current financial year, even this looks like an uphill task.

Sunil Kumar Sinha, Principal Economist and Director (Public Finance), India Ratings, explains. "The GST collection growth in 2019/20 is estimated at 18.2 per cent while the 2018/19 (RE) number is 9.1 per cent. This is a tall order. A slippage of one percentage point will wipe off Rs 3,700 crore from the budget estimate."

The government has revised downward the 2018/19 GST collection target by Rs 1 lakh crore. The target was Rs 7.43 lakh crore. It seems they are likely to garner only Rs 6.43 lakh crore. In the next financial year, it expects to collect Rs 7.6 lakh crore, 18 per cent rise from the revised estimate of 2018/19.

Direct tax revenues have been estimated to grow 15 per cent from Rs 12 lakh crore to Rs 13.8 lakh crore. The focus clearly is on income tax with the government looking to reap the benefits of increased compliance post GST and demonetisation.

The government hopes to see income tax collections rise 17 per cent to Rs 6.2 lakh crore. Shubhada Rao, Chief Economist, Yes Bank, however, says moderation in income tax revenue growth in FY20 is expected due to relief for the middle income group.

Non-tax Revenues

Revenue projections from non-tax sources also look slightly ambitious and give a clear indication that the government will squeeze public sector units, banks and other institutions to exact its pound of flesh. Dividends from central public sector enterprises are estimated to grow 18 per cent to Rs 53,000 crore from the revised estimate of Rs 45,000 crore in 2018/19. This year the government is getting 14 per cent less from the Budget target.

But it seems the Reserve Bank of India (RBI) may come to its rescue, this year as well as next year. The government has revised upwards the likely dividends from the RBI by almost Rs 20,000 crore, or 35 per cent, to Rs 74,000 crore. Next year, it expects dividends from PSU banks and the RBI to go up by another Rs 9,000 crore to Rs 83,000 crore. Since most PSU banks are going through a bad time, almost the entire Rs 83,000 crore dividend may come from the RBI.

While the government has not changed the estimate for disinvestment proceeds (Rs 80,000 crore) for the current year, it has increased it to Rs 90,000 crore next year. This despite the fact that less than two months are left in the current financial year, and the government has only managed to receive Rs 36,000 crore out of the Rs 80,000 crore target. Atanu Chakraborty, Secretary, Department of Investment and Public Asset Management, says 45-55 per cent of disinvestments take place in the fourth quarter only.

Fiscal Gliding Path

Despite uncertainty over revenues, the government once again seems to be optimistic when it comes to fiscal deficit, which it put at 3.4 per cent both for current and next financial years. This is far from the fiscal gliding path that the government had outlined and the FRBM milestone of 3.1 per cent.

Rao of Yes Bank says the dispensation given through packages would be 0.4 per cent of the GDP, which will dilute the fiscal deficit. "The bearing it would have is in terms of higher borrowings," says Rao.

Gross borrowing in 2019/20 is estimated to grow 33.1 per cent compared to -9.3 per cent in the current year. The net market borrowing is estimated to grow 12 per cent in FY20 compared to a drop of 6.2 per cent in the current financial year. This should also impact the quality of government spending with capital expenditures taking a back seat. Sinha of India Ratings, says, "Revenue expenditure is budgeted to grow at 14.4 per cent in FY20 compared to 13.9 per cent in FY19 (RE). However, the capital expenditure is budgeted to grow at only 6.2 per cent in FY20 compared to 20.3 per cent in FY19 (RE)."

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