Need to strictly adhere to a fiscal roadmap from now
The fiscal impulse of 0.4% of GDP appears a reasonable carve out for boosting growth in the current environment
While the general backdrop for the presentation of any Union budget is noisy in a democracy like India, the economic backdrop for this year’s interim budget is rather complex. After the transitory and transitional impact of demonetisation and the Goods and Services Tax (GST), economic activity has started to stabilise, the evidence of which can be seen in the improving trajectory of corporate earnings, rise in the manufacturing sector’s capacity utilisation, and pickup in credit offtake. At the same time, there is also some mixed evidence of rural distress, particularly in the farm sector. If one were to juxtapose this with the volatility seen in the global economy and markets, especially with respect to heightened uncertainty on global trade and crude oil price, a further layer of complexity gets added.
Given this economic prologue, the finance minister (FM) attempted to walk a tightrope.
At the outset, the FY19 fiscal deficit target was revised marginally up by 0.1% to 3.4% of the GDP. This reflects the substantial shortfall in GST revenue collection in FY19 along with the additional budgetary provision for the farm income support scheme.
•GST revenue collection has been trailing in FY19 so far and is expected to result in a shortfall of Rs 1,000 billion on account of reduction in GST rates for many items during the course of the year.
•Along expected lines, the FY20 interim budget announced a farm relief package (Pradhan Mantri Kisan Samman Nidhi) as per which landholding farmers having cultivable land up to two hectares will be provided direct income support at the rate of ~6,000 per year. This scheme will entail an annual expenditure of ~750 billion. For the current financial year, the FM has made ~200 billion provision for PM-KISAN, which is to be disbursed before the end of March 2019.
Purists might not approve of such an outturn as FY19 would mark the second successive year of reneging on the commitment of fiscal consolidation. However, one needs to appreciate that private consumption demand is set for moderation (led by rural distress) while revenue collection is yet to stabilise in the GST era. As far as supporting rural demand is concerned, one would be tempted to think that policy preference has gravitated towards the same in the backdrop of the upcoming general elections.
For FY20, the government has underscored its policy intent of further supporting consumption via tax rebates for the middle class. Incomes up to ~500,000 will receive a full tax rebate vis-à-vis the earlier exemption of ~250,000.
These measures are likely to boost disposable income for the farming community as well as the middle class.
Since the budget could have a reflationary impact on the economy, there could be a bias for interest rates to harden. The FY19 revised estimates indicate a higher borrowing of ~300 billion (as per the H2 market borrowing calendar). For FY20, while the net g-sec supply is expected to remain unchanged at ~4.2 trillion, absorption by the market is unlikely to be smooth as large sized open market operations (OMO) purchases by the Reserve Bank of India (the central bank could potentially conduct ~3.0 trillion g-sec purchases to infuse primary liquidity in the backdrop of balance of payment deficit) is unlikely to see an encore.
Overall, the interim budget has clearly made a policy preference for imparting a fiscal impulse of 0.4% of GDP for stimulating consumption. While this appears like a reasonable carve out for boosting growth in the current environment, the policymakers will have to strictly adhere to the fiscal consolidation roadmap here on and rule out future slippages to avoid getting into an adverse cost-benefit out-turn.