The arithmetic behind the Interim Budget-2019 is questionable!

Overstatement of revenue and understatement of expenditure is a constant problem with Indian budgets…

The interim budget once more proves that the agricultural schemes announced are just a part of any government’s political arithmetic ahead of the Lok Sabha elections. We saw how the guarantee of farm loan waivers worked out in the recent assembly elections in Madhya Pradesh, Rajasthan, and Chhattisgarh.

The income support to farmers stated in the budget is likely to cost the government 0.11% and 0.36% of the Gross Domestic Product (GDP) individually in 2018-19 and 2019-20.

While the government is clearly right in announcing relief to a section of society that is facing stress, it is somewhat necessary to budget for the right price as expenditure for these schemes and give a true picture of the revenue.

Overstatement of revenue and understatement of expenditure is a persistent problem with Indian budgets, and the trend becomes more noticeable in election-year budgets that are heavy on schemes.

Consumption over investment

Through this interim budget, the government has chosen to put more money into the pockets of rural and urban consumers. This is likely to happen in increased consumption and provide some support to low household savings rate. Increased consumption will render into demand for FMCG products and consequently lead to an increment in revenue in the form of GST on them.

Nevertheless, the focus of this budget is clearly on consumption rather than investment. Central government’s capital expenditure is expected to grow 6.2% in 2019-20, whereas the revenue expenditure is anticipated to grow by 14.4%. At a time when the economy is presenting some early signs of investment return, shifting focus from investment to consumption is not a good policy and may lead to thickening of inflation.

The likelihood of any budget can be planned by how accurate the assumptions are. The crucial assumptions made in budget preparation are:

  • GDP growth
  • Expenditure growth
  • Revenue growth
  • Disinvestment
  • Non-tax revenue collections

Deficit numbers – fiscal, revenue and primary – are the end consequences of these.

GDP growth

The nominal GDP growth expected in the budget is 11.5%. This looks likely, although global factors can have a destabilizing impact as witnessed in 2018-19.

Expenditure growth

Revenue expenditure growth in the budget is 14.4%, higher than 13.9% in 2018-19.

On the face of it, it gives an impact of adequate budgeting for schemes announced in the budget. If one adjusts the revenue expenditure for PM-Kisan, which persists at Rs 75,000 crore for 2019-20, the revenue expenditure growth declines to 11.9%.

Interest payment is a sticky number and the government should have a firm estimate of it. On the whole, the expenditure growth seems to be understated in the 2019-20 budget.

Revenue growth

While the expenditure growth is understated, revenue growth assuming look overstated. The aggregate tax revenue growth estimate of 14.9% for 2019-20 is lower than 19.5% achieved in 2018-19. Nonetheless, a closer look at the estimate of various tax revenue components does not inspire confidence.

The Goods and Services Tax (GST) finding growth in 2019-20 is estimated at 18.2%, whereas the 2018-19 growth secures it at 9.1%. This is a tall order. A slippage of 1 percentage point (pp) in the GST growth will wipe off Rs 37 billion (or Rs 3,700 crore) from the gross tax revenue. For 42% of gross tax revenue is shared with the states, overestimation of revenue growth affects state budgets too.

Disinvestment and non-tax revenue targets

The Narendra Modi government is confident of collecting Rs 80,000 crore in 2018-19 and has budgeted Rs 90,000 crore for 2019-20. It will be very difficult for the government to reach this financial year’s target as its disinvestment of Air India could not take off due to lack of takers.

The government is confident that Power Finance Corporation (PFC) buying government stake in the Rural Electrification Corporation (REC), and share buybacks will help it reach the points. But unless there is big-ticket disinvestment in 2019-20, small buybacks and IPOs are unbelievable to help the government achieve the target.

Deficit and borrowing

Based on the income and expense suspicions, it emerges that the government may slip on its fiscal deficit target in 2019-20.

One of the factors to examine is that the budget is developed with old GDP numbers. The Central Statistics Office (CSO) has released first revised GDP estimates for 2017-18 on 31 January.

The nominal GDP estimations could then be revised upwards for 2019-20, giving the government scope for some fiscal slippage while retaining the 3.4% fiscal deficit to GDP ratio.

A larger market borrowing, besides making Reserve Bank of India’s job difficult, will also end in a higher bond yield in 2019-20. Although the RBI is expected to change its monetary stance to neutral from calibrated tightening in its February 2019 policy review, the rate cut will become a hard exercise in the present global situation.

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