The National Democratic Alliance (NDA) government’s last full-fledged budget before the elections next year, was widely expected to deviate modestly from fiscal deficit targets, while prioritising its expenditure outlays on areas that could support the ongoing economic recovery and also address some of the critical issues plaguing the rural and agricultural sectors. Additionally, an area of interest was the forecast on revenue buoyancy for FY2019, given that the series of structural reforms carried out over the last couple of years were primarily expected to provide a fillip to tax revenues—both direct and indirect.

The budget has expectedly focused on the rural, agricultural and MSME sector with a series of policy announcements designed to improve farmers’ income, provide extensive health coverage, facilitate credit flow to MSMEs and significantly increase targets for disbursements under the MUDRA Yojana. Similarly, there has been an increase in the outlay on the infrastructure sectors.

However, the total capital outlay, including gross budgetary support and the internal extra budgetary resources of various ministries is estimated to grow by only 3.8% in FY2019 budget estimates (BE) compared to FY2018 RE (real estimates). Clearly, more than budgetary allocations, there would be increased reliance on funding public investments through borrowings by public sector units, SPVs (special purpose vehicles) like the affordable housing fund and through monetisation of assets like the toll-operate-transfer model being implemented by the National Highways Authority of India (NHAI).

Given the disruption in revenues following structural changes such as the introduction of the goods and services tax (GST), and the need to boost government expenditure to prop up growth, the government of India has expectedly indicated a deviation of 30 basis points (bps) each in its fiscal deficit, relative to the previously announced targets for FY2018 and FY2019. However, following a pause in FY2018, it intends to revert to fiscal consolidation, aiming to pare its fiscal deficit-to-GDP ratio to 3.3% in FY2019 BE from 3.5% in FY2018 RE.

The forecast of 11.5% for growth of nominal GDP for FY2019 appears realistic. Excluding the GST compensation cess, the pace of growth of the gross tax revenues of the government of India is estimated to rise sharply to 15.7% in FY2019 BE from 9.8% in FY2018 RE, led by an expected stabilisation of indirect taxes after the disruption related to the GST. Moreover, non-tax revenues are forecast to rise by 3.9% in FY2019 BE after having contracted by 13.5% in FY2018 RE, led by lower dividends from PSUs (public sector units) and the Reserve Bank of India (RBI) as well as a dip in inflows from the telecom sector. While the target for disinvestment and strategic divestment has been reduced to Rs80,000 crore in FY2019 BE from Rs1 trillion in FY2018 RE, it may nevertheless be challenging to complete solely through the market route.

With the GST having been implemented, there were no changes expected on the indirect tax front. There has been an increase in customs duty on several items which is expected to provide a boost to local manufactures of such products. The reduction in tax rates for corporates with a turnover of less than Rs250 crore would primarily benefit sectors like textiles, leather and ceramic tiles, which are highly fragmented and have a large number of small players. The ongoing resolution process under the National Company Law Tribunal (NCLT) has been provided favourable tax treatment in terms of carry forward of unabsorbed depreciation and brought forward losses even in the case of change of ownership.

The budget reiterated its commitment to support and deepen the corporate bond markets, including lowering the threshold rating level for investments, rationalising stamp duty across states and possibility of the Securities and Exchange Board of India (Sebi) mandating large corporates to meet one-fourth of their financing requirements through the bond route. The extent to which this provides a fillip to lower-rated corporates accessing the bond markets remains to be seen, given the presence of several other headwinds.

Overall, the budget is clearly focussed on the rural and social sectors with the objective of increasing agricultural income and improving the quality of rural infrastructure and healthcare. Smaller corporates would benefit from the tax rate cut. However, with the hardening of bond yields, there will be some impact on the cost of borrowings for all entities. Also, the funding pattern of many of the ambitious schemes is not clear, and the provision for the oil and fertiliser subsidy appears modest. These could pose some additional downside risks for fiscal deficit.

Anjan Ghosh is chief rating officer, ICRA Ltd