Budget 2019: Fiscal Deficit Math Relies On Ambitious Revenue, Dividend Targets

The Indian government is targeting a fiscal deficit of 3.3 percent for 2019-20 despite fears that a slowdown in the economy will lead to a shortfall in revenue and a wider fiscal deficit.

At 3.3 percent, the fiscal deficit is marginally lower compared with 3.4 percent in 2018-19. The revenue deficit has been pegged marginally higher at 2.3 percent of the GDP compared with 2.2 percent last year.

A year ago, the government said it would stop targeting revenue deficit as it believed that segregation of capital spending and revenue spending was not valid for a growing economy like India, which needs constant upgrading of infrastructure. Yet, economists tend to see the trend of a higher revenue deficit as a sign of poor fiscal management.

Revenue Picture Ambitious

The question as always will be whether the assumptions behind the fiscal deficit projection are realistic. Here, the government continues to project optimistic targets for both tax and non-tax revenue.

• Total revenue is expected to rise by 25 percent over the provisional numbers for FY19 put out by the Controller General of Accounts.
• Net tax revenue is expected to rise by 25.2 percent.
• Non-tax revenue, including dividends from public sector enterprises and the Reserve Bank of India, is expected to rise 27 percent.

The tax revenue projections have been bench-marked to an expected 11 percent growth in nominal GDP for the year.

Divestments and Dividends

The government is relying heavily on both divestment proceeds and dividends to meet the fiscal deficit target of 3.3 percent of GDP.

• The government is hoping to garner over Rs 1 lakh crore in dividends from the RBI, financial institutions and PSU banks. A large part of dividends in this category come from the RBI. Subhash Chandra Garg, secretary, Department of Economic Affairs, said the government expects Rs 90,000 crore in dividend from the RBI.
• The government has also budgeted for over Rs 1 lakh crore in disinvestment proceeds for the year.

The Expenditure Story

The expenditure patterns remain unchanged from what was projected in the interim budget, where modest increases in expenditure were targeted over FY19’s revised estimates. However, just like revenue, expenditure too fell short going by the CGA’s provisional data for the year.

• Compared to the provisional estimates for FY19, an expenditure increase of 20 percent is being budgeted.
• Revenue expenditure is set to rise by 21.9 percent.
• Capital expenditure, on the budget, is set to rise by 11 percent over what it settled at in FY19.

Off-Budget Spending

For the first time, the government has included extra budgetary resources, which include fully serviced government bonds, in the budget estimates for 2019-20. This would alleviate some of the fears that the government is pushing certain kinds of spending to the books of public sector entities like the Food Corporation of India.

After accounting for the change in the way EBR is classified, the total spending in this category stands at Rs 4.43 lakh crore for the current year. This, the government said, compares to Rs 4.29 lakh crore after excluding Rs 97,000 crore in borrowings from FCI from the category for FY19.

Borrowing Profile

In terms of numbers, the borrowing profile of the government does not change much from when the interim budget was presented.

However, a major structural change has been made with the government deciding to borrow in foreign currency. So far, the government has stayed away from this due to fears of excessive volatility in the domestic interest rate markets. But as domestic household savings fall, the government is now looking to tap overseas borrowings to meet its expenditure needs without crowding out domestic borrowers.

The government is yet to decide on how much they will borrow overseas. As such, for the year, gross borrowings remain at Rs 7.10 lakh crore. Net borrowings are pegged at Rs 4.23 lakh crore.

Borrowings from the small-savings pool remain high at Rs 1.3 lakh crore.