Why the fiscal deficit target of 3.8% for FY20, still does not add up

BL Research Bureau

With the Centre’s fiscal deficit hitting 132 per cent of full year target by December, the Budget relaxing the target for the fiscal deficit to 3.8 per cent (from 3.3 per cent) was almost a given. The Centre taking cover under the provisions of the FRBM Act, and allowing itself leeway on the fiscal front, in the next fiscal was also on the cards. The fiscal deficit target for FY21 has been fixed at 3.5 per cent.

But despite the sharp slip on the fiscal deficit target, the numbers do not add up. In fact, if the still ambitious target on disinvestment, income tax collections and spectrum are brought down to more realistic figures, then the fiscal deficit of 3.8 per cent too looks difficult to achieve, unless expenditure is cut back sharply in the fourth quarter. For now, the Centre has only lowered expenditure marginally by 3 per cent from the budgeted figure.

Above all, the 10 per cent nominal GDP growth assumption for FY21, has completely glossed over the current economic slowdown. Meeting the 3.5 per cent fiscal deficit target appears an extremely difficult task, given the revenue and expenditure projections.

The biggest issue however is to make sense of the gross market borrowings figure. In the previous Budget the Centre’ gross borrowings for FY20 were pegged at Rs 7.1 lakh crore. This has been retained at the same level in the revised estimates, despite the central gross borrowings upto Jan 24, standing at Rs 6.82 lakh crore and fiscal deficit at Rs 9.3 lakh crore so far until December (against the revised Rs 7.6 lakh crore for FY20 in the Budget).

How has the Centre managed to keep a lower gross borrowings figure and please the bond market? The Centre has once again dipped into the pool of small savings fund to finance its fiscal deficit. The reliance on the NSSF has shot up sharply. In the previous Budget, financing through small savings was pegged at Rs 1.3 lakh crore for FY20. This has been increased to a whopping Rs 2.4 lakh crore for this fiscal and the next!

Dodgy assumptions

Taking stock of the shortfall in revenues so far, the Centre has revised the revenue projection for FY20 from the previous Budget. For instance, it has lowered tax revenues (net) by 8.7 per cent from the budgeted number. But this still assumes a 14 per cent growth from FY19, which given the performance so far looks difficult. For the April-December period, gross tax revenues have actually shrunk by 3 per cent (after a meagre 0.8 per cent growth until November). Fall in corporate tax of 13.5 per cent, and lower collections from excise and customs has impacted tax revenues. Importantly, income tax has grown by a modest 5.1 per cent till date. But the Budget has revised down income tax collections estimate by only 1.6 per cent for FY20.

But what is more perplexing is that despite the weak disinvestment proceeds so far (Rs 18,000 crore), the Centre has retained Rs 65,000 crore target for FY20. This would be a tough task to achieve. The spectrum proceeds is another weak link. After assuming Rs 50,500 crore of spectrum proceeds for FY20---which was difficult right from the start--the Budget has simply revised it upward to Rs 58900 crore for FY20.

The revenue and expenditure assumptions for FY21 are dodgy as well.

The Centre has pegged in 14 per cent growth in income tax collections for FY21, which on an already unachievable base of FY19, looks too optimistic. How the various tax cuts announced sans the exemptions impacts the overall tax collections needs to be seen.

After lowering GST projections for FY20 to Rs 6.12 lakh crore (from Rs 6.6 lakh crore in the previous Budget), the Centre has pencilled in Rs 6.9 lakh crore for FY21. Given the persisting issues in GST, this appears an ambitious target.

Over to disinvestments

It appears that the Centre’s entire hope is pinned on disinvestment proceeds. While attaining the Rs 65000 crore in FY20 itself looks tough, the Centre has pegged in a whopping Rs 2.1 lakh crore for FY21. Of this Rs 90,000 crore alone will be from disinvestment of government stake in PSU Banks and Financial Institutions (LIC). Interestingly, the Centre has not made any provision for bank recapitalisation for FY21, indicating that it may look more seriously into reducing its stake in PSU Banks.

But fetching the right value and kindling investor interest will be critical.

Unrealistic borrowings?

The most perplexing figure in the fiscal math is the low borrowings despite the sharp slip on deficit target. The answer lies in the borrowings from small savings fund which has nearly doubled from last year. In the previous Budget the Centre’ gross borrowings for FY20 were pegged at Rs 7.1 lakh crore and net borrowings at Rs 4.48 lakh crore. The Centre’s fiscal deficit so far has been financed by Rs 6.45 lakh crore of total net market borrowings, 144 per cent of the budgeted Rs 4.48 lakh crore!

But the Budget has assumed the net market borrowings to go up to just Rs 4.98 lakh crore for FY20, by borrowing Rs 2.4 lakh crore (against Rs 1.3 lakh crore) from small savings fund.

While this has warded off a sharp rise in yield in the bond market for now, it has to be remembered that financing through small savings comes at a high cost. Also, with fiscal deficit likely to slip further, the relief in the bond market may only be short-lived.

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