Unrealistic revenue projections

The macroeconomic impact of a Budget has to be judged primarily by the demands that the government makes on the household and corporate sector through its taxation and borrowing proposals. The impact of how much it spends also matters for macroeconomic health.
 
The Budget has presented its numbers comparing Budget estimates with revised estimates for last year. However, because the Budget is being presented in July we have the Controller General of Accounts estimates of provisional actuals which are substantially different from the revised estimates presented in the Interim Budget in February 2019. Using these provisional actuals as the base, the implied growth rate in the Budget forecasts is 25 per cent for total receipts (25.6 per cent for net revenue receipts) and 20.5 per cent for total expenditure.

 
The revenue projections are unrealistic. With an expected real growth of 7 per cent and inflation being contained within a 3-5 per cent band, nominal GDP growth would be 10-12 per cent. The revenue projections imply an elasticity of more than two which is not likely to be realised. Clearly the Rs 1.67 trillion shortfall in the provisional actuals of revenue in 2018-19 has not been taken into account. In all probability, the end of the year will see the same jugglery with the subsidy payments that we saw this year to keep the deficit figure on target. The real deficit is more likely to be closer to 4 per cent than the 3.3 per cent indicated in the Budget.

 

The budget for 2019-20 has assumed an inflow of Rs 1.05 trillion from asset sales, higher than the Rs 80,000 crore realised in 2018-19. Asset sale by the government is not very different from a debt-strapped promoter selling some of his assets to meet liabilities. The main economic gain would be if the asset sale comes with the transfer of management to a private buyer who is able to utilise the assets better. A mere sale of minority of shares directly or through ETFs may help the finance ministry to stay within targeted deficit limits. But if the proceeds of asset sales are used to finance current consumption then the beneficial effects of deficit containment are more or less lost. If on the other hand, they are used for sound asset creation through new investments then it would amount to a reshuffling of the governments asset portfolio and may be of economic benefit in the medium- or long-term. The central government’s direct capital expenditure in this year’s Budget is up by 11.8 per cent relative to the provisional actuals for the previous year. The revenue expenditure is up by 21.9 per cent on the same basis. One cannot escape the conclusion that asset sale proceeds are going towards current consumption.

 
The government’s borrowing requirement, which is the gap between current receipts and expenditures, is met mainly by market borrowing with about a third being financed from inflows into small savings and provident funds and draw down of cash balances. This year, the central government’s market borrowing will be about 2.2 per cent of GDP. In FY19, the RBI absorbed nearly 75 per cent of the fresh issuance of government securities, partly to infuse liquidity into the market hit by the NBFC crisis. Large redemptions of government debt will begin starting 2019-20 and gross borrowings in the new fiscal will be high. The N K Singh panel to review India’s existing Fiscal Responsibility and Budget Management (FRBM) rules recommended a debt-to-GDP ratio of 40 per cent for the Central government by financial year 2022-23. At present it is around 48 per cent and is not expected to decline much in this financial year. Looking at the medium term projections in the Budget papers, the Singh Committee goal does not look attainable.

 
Adding the demands of state governments and public enterprises, the public sector borrowing requirement is about 9 per cent of GDP and that pre-empts virtually all of financial savings of the household sector. This year’s Budget has announced the government’s intention to raise some of its borrowing requirements from external sources. Hopefully, somebody in the government has worked out what it would cost given our borderline investment grade sovereign credit rating.
 
The state of the credit market is a major source of macroeconomic concern. Though the NPA problem of banks seems to be coming under control, the crisis in the NBFC sector is still not resolved. The core of the problem is the asset liability mismatch as the NBFCs funded these with short-term loans from banks and mutual funds, each of these accounting for roughly one-half. With the large defaults by a couple of major players, even the more solvent NBFCs are suffering because of greater caution by banks and a closer scrutiny of ratings by liquid and debt mutual funds. The bulk of the holdings in liquid and debt funds are held by corporates whose treasury departments are also becoming more cautious and looking for safer havens for parking their surplus funds.

 
The NBFC were an important lending source for cash-strapped promoters, property developers, small industries, purchasers of housing and durables. And the drying up of credit flow from them will constrain the goal of boosting private investment. The Budget proposal to guarantee bank borrowings by NBFCs who have a sound credit record will certainly help. And the commitment to provide Rs 70,000 crore as capital infusion into public sector banks will improve liquidity. Hopefully this will improve the transmission of rate cuts and reduce the credit risk spreads that widened when the NBFC crisis broke.
 
This Budget has taken some risks in fiscal management and the deficit (and the government’s borrowing requirement) may be larger than the forecast. The measures to boost investment by and in the start-ups and SMEs, and the measures taken to boost liquidity and credit flow will give some boost to growth. But one would have liked to see some moves to stimulate exports and reduce the real cost of capital, both of which were flagged as areas for action in the Economic Survey.

 nitin-desai@hotmail.com