Sitharaman balances hopes, aspirations and fiscal math

As expected, the Union Budget for FY21 has targeted a sharply higher fiscal deficit of 3.5 per cent of GDP in the budget estimates (BE) for the coming fiscal, relative to the rolling target of 3 per cent of GDP that had been set in July 2019.

However, the fiscal deficit is expected to decline in FY21 from the 3.8 per cent of GDP included in the revised estimates (RE) for FY20, which appears somewhat challenging.

The Centre has sharply pared the food subsidy allocation that it would provide to the Food Corporation of India (FCI) from the Budget to ₹1.1 trillion in FY20 RE from ₹1.8 trillion in FY20 BE. An additional ₹1.1 trillion is being provided to the FCI as a loan from the National Small Savings Fund (NSSF) in FY20 RE, to finance a portion of the food subsidy requirement as well as the debt servicing of loans availed from the NSSF in the previous years.

In FY21, the government has budgeted ₹1.2 trillion as food subsidy from the Budget, and has allocated an even higher off-budget amount of ₹1.4 trillion as loan to FCI from NSSF in that year.

The budgetary allocation for capital expenditure has been increased by ₹103 billion in the FY20 RE relative to the budgeted level, setting aside fears of a cut in capex.

Capex enhanced

Moreover, the capital expenditure for FY21 has been enhanced by a healthy 18 per cent or ₹632 billion, although this is partly offset by a disappointing reduction of ₹379 billion in the internal extra-budgetary resources in FY21 BE relative to FY20 RE.

Some of the revenue assumptions made in the Budget for FY21 appear optimistic.

Accordingly, the incoming data on receipts from tax revenues, non-tax revenues from other communication services, and disinvestment proceeds in FY21, would determine the credibility of the fiscal math.

This would also have an impact on the trend in yields of government securities, even though the net borrowing requirement announced for FY21 is within the range expected by the market.

Notably, the funding of the fiscal deficit from small savings is expected to go up sharply from ₹1.25 trillion in FY19 to ₹2.4 trillion each in FY20 RE and FY21 BE.

This suggests that small savings interest rates are unlikely to undergo any meaningful correction in the coming 4-5 quarters, irrespective of the policy action that is undertaken by the Monetary Policy Committee.

A note of caution for state fiscal trends: as expected, the central tax devolution (CTD) to the States has undergone a substantial correction in the RE for FY20 to ₹6.6 trillion from the budgeted level of ₹8.1 trillion, on account of both the adjustment for FY19 (₹0.6 trillion), with the balance on account of the downward revision in the government’s tax forecast for FY20. This entails a considerable contraction relative to the ₹7.6 trillion that had been transferred to the States as CTD in FY19.

Moreover, the balance central taxes to be devolved in Q4 FY20 would decline sharply to ₹1.8 trillion from ₹2.7 trillion in Q4 FY19, posing a key risk to managing State finances in the last quarter of FY20, as well as sustaining the momentum of economic growth.

Tax mop-up

If the gross central tax collections of the government do not evolve in line with the 12 per cent growth assumed in the Budget relative to the FY20 RE, then the expansion in CTD to ₹7.8 trillion in FY21 BE would come under a cloud.

Moreover, 10 of the 28 States have seen a reduction in their inter se share in central tax devolution as per the interim report of the Fifteenth Finance Commission for FY21, and would need to carefully assess their revenue situation.

The writer is Principal Economist, ICRA

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