Budget 2019: Brace for 20 to 40bps slippage in fiscal deficit

July 6, 2019
New Delhi: Agriculture, rural development and investments remained the focus for the government’s full Union budget for FY20. The government has conservatively cut down net tax revenue estimates by 3.7 per cent YoY while maintaining the revenue expenditure. Capital expenditure has also seen a marginal additional allocation of Rs 23 billion from interim estimates, marking a 6.9 per cent growth for FY20.

Fiscal deficit for FY20 is revised lower by 10bps to 3.3 per cent vs. earlier estimate of 3.4 per cent, significantly below our estimate of 3.8 per cent-4.3 per cent. The government has increased the divestment target by Rs 150 billion from Rs 900 billion to Rs 1,050 billion, marking a 31.3 per cent increase YoY.

Total expenditure has seen increase of 13.4 per cent YoY, while revenue expenditure by 14.3 per cent YoY and capital expenditure by 6.9 per cent YoY. Revenue expenditure has remained flattish from interim estimates.

Fiscal deficit estimate for FY20 is also maintained at 3.3 per cent of the GDP. Nominal GDP has been estimated to increase by 0.5 per cent to 11 per cent YoY for FY20 from interim estimates. However, looking at the current slowdown in the economy, GDP estimates look a little stretched and we sense the nominal GDP to grow at about 10 per cent-10.5 per cent for FY20.

Slippages in GST collections in FY19 coupled with slowdown in economic growth have led to reduction in GST estimates for FY20 by Rs 979 billion from the interim estimates. The government has, in the past, resorted to deferment of capital expenditure in order to contain fiscal deficit. But it is not expected to curb capital expenditure now citing emphasis on the need for infrastructure spending for reinvigorating slowing economic growth. In the light of the above, we expect that fiscal deficit might slip by 20 to 40bps but with a remote possibility of a large slippage as expected previously.

Capital expenditure for FY20 is pegged at Rs 3,386 billion, marking an increase of 6.9 per cent YoY. Though the capital expenditure has been increasing in absolute terms, it has been sticky at 1.5-1.6 per cent of the GDP.

Rs 941 billion has been allocated to railways marking an increase of 9.6 per cent YoY. Rs 100 lakh crore has been allocated for development of rural and urban infrastructure, including highways and roadways over the next five years.

The budgeted Revenue Expenditure for FY20 shows an increase of 14.3 per cent YoY amounting to Rs 24,478 billion from FY20. Agriculture, rural development, infrastructure and FDI investments have been the key focus for FY20, laying the roadmap for the next five years.

The government has strongly laid emphasis on the need of PPPs for better materialisation in the infrastructure sector. FY20 has also seen an increase of Rs 650 billion in agri and allied activities in FY20. Subsidies have seen an increase of Rs 3,50,477cr from last year.

Rationalisation of KYC norms for FPI investments, raising limits for investments in specific sectors, merging NRI investment routes with FPI investments as well as opening avenues for 100 per cent FDI investments have been taken up in the budget. Deepening of the bond markets, including corporate bonds is in the pipeline for better mobilisation of funds especially focusing on investment in infrastructure.

For FY20, the government has estimated a conservative growth of 11.3 per cent YoY amounting to Rs 13,350 billion in gross direct tax revenue collections by lowering the growth for personal income taxes by 9.6 per cent from interim estimates.

The government has given growth rate of 14.2 per cent YoY for corporate taxes. Extending the bracket of corporate taxes at 25 per cent for companies having turnover from Rs 250 crore to Rs 400 crore is a major tax rationalisation step which can have impact on collection of corporate taxes along with easing angel tax provisions.


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