View: An expenditure-led fiscal expansion could be Sitharaman's choice in this Budget


By Aditi Nayar

With India in the midst of a slowdown in GDP growth, all eyes are on the Union Budget for FY21 to provide some fiscal push to revive economic activity. We believe this push should come by way of higher spending instead of tax reductions. With revenue growth anyway expected to be moderate, the Union Budget is likely to peg the fiscal deficit for FY21 significantly higher than the rolling target of 3% of GDP that had been indicated in the previous budget.

But first, there are several revenue and expenditure uncertainties, which are clouding the assessment of the size of the Government of India’s (GoI’s) eventual fiscal deficit for FY20. The revenue uncertainties include the extent of shortfall in net tax revenues, whether an interim dividend would be provided by the Reserve Bank of India (RBI), the final magnitude of AGR dues to be paid by telecom and non-telecom license holders, and the size of disinvestment proceeds. If we assume no interim dividend payment by the RBI (beyond the transfers made in August 2019, which were appreciably higher than budgeted), no receipt of AGR dues in FY20, a net tax shortfall of Rs. 1.7 trillion and a gap of Rs. 0.8 trillion in terms of disinvestment proceeds, the GoI’s receipts are estimated to be lower than the FY20 Budget Estimates (BE) by around Rs. 1.9-2.0 trillion.

News reports suggest that the GoI is considering undertaking an expenditure cut of a similar magnitude of Rs. 2.0 trillion in FY20. In any case, there could be substantial unspent balances that would be surrendered in some schemes such as PM-KISAN. Nevertheless, spending may need to be consciously trimmed in some departments, and payments to contractors may get deferred. An expenditure cut of Rs. 2.0 trillion relative to the level budgeted for FY2020 would still leave a headroom of incremental spending of Rs. 7.7 trillion in the last four months of FY20, entailing a moderate growth of 9.8% relative to the expenditure in these months of FY19.

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In contrast, there was a considerable amount of unpaid subsidy that was carried forward to FY20 from FY19, and we expect a spillover to FY21 as well. Additionally, given the modest collections of GST compensation cess in the current year relative to the amount of compensation that needs to be released to the state governments, as well as the balance of previous years available in the GST compensation fund, there remains lack of clarity whether the GoI would provide funds for the same through the Consolidated Fund of India.

Overall, it is expected that the government’s fiscal deficit may not cross 3.5% of GDP in FY20, unless various off-budget items are brought on-budget, or a sizeable amount of GST compensation is provided through the government’s own revenue sources.

In terms of the upcoming Union Budget, a nominal GDP growth of 10-10.5% for FY21. If the government places its fiscal deficit for the coming year at 3.5-3.8% of GDP, substantially higher than the rolling target of 3% of GDP, this would roughly translate to a fiscal deficit of Rs. 7.9-8.5 trillion, in absolute terms.

The government had already announced a cut in the corporate tax rates in September 2019, the revenue implications of which remain uncertain. Major changes in direct taxes, such as the personal income tax, should not be undertaken in the upcoming Budget.

The Union Budget for FY21 should prioritise infrastructure spending, especially on the sectors highlighted in the recent report of the task force for the National Infrastructure Pipeline (NIP), such as roads, affordable housing, railways, power etc. This would address various infrastructure bottlenecks, boost the core sectors, and create a multiplier effect on the economy. The associated job creation would eventually trickle down to higher consumption as well.

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Additionally, a step up in the allocation for MGNREGS is likely to boost rural consumption, while also leading to asset creation. Given that the number of beneficiaries enrolled under PM-Kisan so far, are lower than expected, the government could consider increasing the amount of income support per beneficiary. Moreover, some new schemes to support the rural economy and MSMEs and to support job creation, may be announced in the Budget.

The NIP report placed the combined investment for FY21 by the Centre, states, and private sector at Rs. 19.5 trillion. Of this, a modest Rs. 4.6 trillion would be provided by the government through capital outlay in FY21, of which the budgetary support from the Centre is meant to be limited to Rs. 1.9 trillion. The financing for the remaining Rs 2.7 trillion remains unclear, at present. The BE for FY21 for the government’s expenditure and fiscal deficit levels should adequately reflect the amount required for the NIP, for the market to consider them credible, and also clarify the sources of extra-budgetary funding for the Centre’s share of the cost of the NIP.

(The writer in Principal Economist, ICRA. Views expressed are personal)





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