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Interim Budget: Economic Priorities over fiscal consolidation

Budget positive for growth, says DBS


Budget positive for growth, says DBS



India’s interim Budget for FY20, announced 1 Feb 2019, suggests that the economic priorities have taken precedence over near-term fiscal consolidation as the 3% of GDP fiscal target stands delayed, writes Radhika Rao, Economist at DBS’ Group Research in Singapore.

The consumption-push and growth stimulus will be positive for growth, but limits scope for an aggressive monetary easing cycle, said Rao in a commentary on the India budget on 1 Feb 2019.

“We also note that this Interim Budget holds till July 2019, when a full-year budget is likely to be tabled, after the general elections.”

The outgoing year and FY20 marked a modest fiscal slippage. The government revised up the FY19 fiscal deficit at -3.4% of GDP vs -3.3% in the budgeted estimate.

“This was broadly in line with our expectations where -3.5% was seen a red line for any deterioration in the math. The slippage is more notable for FY20, to -3.4% vs -3.1% laid out in the roadmap, built on a 11.5% nominal GDP growth projection,” said Rao

The breakdown reveals that the government has built in aggressive revenue assumptions in FY20, despite factoring in a slowdown in nominal growth to 11.5% vs revised 11.8% in FY19.

As a percentage of GDP, gross tax revenues are forecasted to improve by 0.2% of GDP, with the bulk of the lift seen coming from higher income tax collections as well as GST revenues.

Firstly, the Government’s GST revenues fell short by INR1trn in FY19 compared to budgeted estimates, despite which an Rs.1.1 trillion increase in built into the FY20 receipts (from Rs.5.03 trillion to Rs.6.1 trillion).

Recent reduction in GST rates, higher thresholds and wider umbrella of tax payers under the composition scheme are also likely to slow collections further in FY20, Rao pointed out.

Secondly, income tax revenues are also projected to improve, factoring in a wider tax base and improved compliance. Under other revenue heads, excise duty collections are expected to moderate as oil prices ease and past tax cuts bite.

Notwithstanding the year-to-date disappointment over divestment proceeds, FY20 budgets a target of Rs.900 billion vs Rs.800 billion in FY19 (with actual collections at a third).

Dividends and profit transfers from the RBI and other public sector entities, is projected to increase marginally from Rs.1.2 trillion to Rs.1.4 trillion.

With lack of fresh revenue generating measures in the interim budget, much of the funding is likely to arise from higher markets-based borrowings.

Higher revenue projections are meant to plug an increase in spending requirements, as the government adopted a pro-consumption focus in the Interim Budget, said Rao.

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