Budget consistent with fiscal strategy; aimed at boosting demand

The budget announcements for financial year 2020-21 (FY21) is consistent with the fiscal strategy, which is geared towards boosting demand. And it contrasts the extremely conservative approach adopted in FY19 when spending was retracted to meet fiscal deficit target in the face of large tax revenue shortfall.

Tax shortfall continued even in FY20 at Rs 3 trillion and its growth is expected to be modest at 12 per cent in FY21BE. But it has not prevented the government to continue spending. The 13 per cent spending growth budgeted for FY21 at Rs 30 trillion is over high growth of 17 per cent in FY20. The savings from lower interest payment on government debt is also seen boosting revenue spending net of interest cost; It grew by a huge 19 per cent in FY20 and budgeted to growth by 13 per cent in FY21BE.

The fiscal multiplied impact of higher government consumption spending is coupled with signal to household sector to spend more. This comes in the form of reduced income tax rate for middle income by 5-10 per cent range up to Rs 15 lakh annual income, provided they opt to forego tax exemptions. In our view, the combination of stepped government revenue spending and household tax savings will increase household disposable income, which can be leveraged for consumption boost.

The math in arriving at the fiscal deficit target of 3.8 per cent of GDP for FY20 and 3.5 per cent in FY21BE hinges on several one-off items. In FY20, the shortfall in gross tax collection of Rs 3 trillion and slippage on disinvestments (Rs 400 billion) is compensated by lower tax devolution to state government (Rs 1.53 trillion), lower interest payment (Rs 350 billion), transfers from RBI (Rs 363 billion), lower subsidy outgo (Rs 1.05 trillion) and higher fiscal deficit (Rs 760 billion). In FY21 the rise in gross and net tax revenue (net of devolution to states) by 12 per cent and 8.7 per cent, respectively imply very high dependence on disinvestment target of Rs 2.1 trillion versus a meager Rs 650 billion in FY21BE. This is critically dependent on the initial public offer (IPO) of Life INsurance Corporation of India (LIC). In our view, the lower base of FY20 and economic recovery will have an upside risk to tax collection in FY21, even as disinvestments carries a downside risk.

Looking at the allocation of expenditure across departments shows considerable focus on agri sector, department of telcom, transfer to states by way of grants, support to Jammu & Kashmir and women & child welfare, education. In particular the department of agriculture has seen a steep rise of 121 per cent in FY20RE and is budgeted to expand by 32 per cent to Rs 1.34 trillion in FY21BE. Also, while the ministry of rural development was budgeted to grow only by 5 per cent in FY20, its revised estimate in higher by 10 per cent. While in FY21BE the allocation for rural development has remained unchanged at Rs 1.2 trillion, the actual is likely to be somewhat higher. Overall, allocation across sectors indicate high focus on the rural economy including agriculture (Rs 2.5 trillion in FY21BE), averaging a growth of 27 per cent during FY20RE-FY21BE. 

Summing up, the fiscal strategy of FY21 budget appears to sustain the demand support by way of fiscal spending and a liberal approach on fiscal deficit management in the near-term, thereby enabling private consumption demand. Allowing tax incentive to sovereign wealth fund for investments in domestic infrastructure is a reflection of feeble domestic private investment cycle. The hope is that as the liberal fiscal strategy pans out over time, improvement in corporate performance will encourage them to start private investments.
 

Dhananjay Sinha is head of strategy & chief economist, IDFC Securities. Views are personal