Budget 2021: Fog Over Revenue, Spending Estimates To Worsen

Budget estimates and revised estimates presented by the finance minister each year are the subjects of much debate. This has been particularly true in the last few years due to volatility in the economy, the early presentation of the budget and optimistic projections from the government.

Since FY17, the gap between the revised estimates and the actual receipts has widened. In FY19, for instance, actual receipts were 5.7% below even the government’s revised estimates. A similar trend has played out for expenditure.

This fog over budget numbers is set to worsen with this year’s budget presentation. The actual receipts for FY20 are likely to be lower than revised estimates as the economy slowed, while revised estimates for FY21 will be much below the budgeted amounts due to the Covid-19 crisis. To top it all, making an accurate assessment of revenue and expenditure for the next fiscal year will be a challenge.

FY21 RE: A Case Of Throwing Darts

Given the volatility in the economy this fiscal—GDP contracting 24% in the first quarter, 7.5% in the second quarter and may return to growth in the third quarter—settling on the revised estimate will not be easy.

This is how Kaushik Das, chief India economist at Deutsche Bank, is estimating final revenues for the government:

• In the last three fiscal years, net tax revenue collection between December-March has been about 44.3% of the full year actual collection. If that trend holds, total net tax collection will come in at 86.4% of the FY21 budget estimate.
• Overall revenue, after accounting for the shortfall in divestment, could be about 2.7% of GDP, Deutsche Bank estimates.
• Total expenditure could be higher than FY21 budget estimate by about 1% of GDP. This estimate is based on the increase in government spending in October, November along with the additional spend on account of Covid-19 relief. Low spending until September will prevent a larger overshoot.

Others expect a lower deficit number, underscoring the uncertainty around budget numbers.

Neelkanth Mishra at Credit Suisse sees the pick-up in growth provide a boost to revenue collections. “The centre not raising borrowing targets implies fiscal deficit 6.5-7% of GDP vs. the 7.5-8% many still expect,” he wrote in a note on Jan 4.

FY22 BE: Watch The Assumptions

The ambiguity on budget numbers will not end with the revised estimates for FY21. The next question for the finance ministry will be—what growth should we project for FY22?

For FY21, nominal GDP will be about 5-6% lower than what it was the previous year, said Devendra Pant, chief economist at India Ratings & Research. That becomes the base level for the proceeding year, he said. “Most estimates for real GDP growth in FY22 range between 9-10% because of the base effect,” said Pant. “As such, using the GDP deflator to estimate nominal GDP, one will arrive at a number slightly higher than 13% or so.”

Real GDP growth is projected to contract by 7.5% in FY21, according to the RBI’s latest estimates. The government’s own estimates may not differ much.

NR Bhanumurthy, the vice-chancellor at BASE University, said that in the current scenario, every number will have its own challenges.

One could look at money supply growth, which is a certain number. So, if the RBI permits money supply to grow by 15% next year, that could be considered for the nominal GDP projection, according to Bhanumurthy. “Often in the past, before inflation targeting was adopted, 14.5% was the magic number in the ministry of finance,” he said.

Once a nominal GDP growth number is settled upon, the standard tax buoyancy formulae will apply, Bhanumurthy explained. Tax buoyancy represents the relation between GDP and tax collections. “Past data on corporate tax and income tax is large enough to estimate buoyancy with fewer errors,” he said. “What we don’t have as yet is reliable figures for buoyancy for GST.”

So which numbers will give us the clearest sense of government support to the economy in the coming year?

Expenditure as a percentage of GDP will be one and will tell us whether the government’s support for the economy will rise or fall next fiscal. “Expenditure is always much more reliable than revenue,” said Bhanumurthy. “The expenditure numbers in the budget are coming from the demand from grants generated ministry wise. As such, expenditure is relatively better estimated than revenue.”

The fiscal deficit and market borrowing numbers will also remain in focus but will be subject to much scrutiny. “How clean the numbers are will depend on how realistic or optimistic the estimates that they are based on will be,” he said.