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A file photo of Finance Minister Nirmala Sitharaman
A file photo of Finance Minister Nirmala Sitharaman

Balancing the fiscal math is Sitharaman’s challenge

  • Given the slowdown in economic growth, FM Nirmala Sitharaman will be assessed on her ability to balance her budget against the interim budget numbers
  • The windfall gain of transfer of surplus from RBI, which govt was expecting before the budget, has not materialized

NEW DELHI : When finance minister (FM) Nirmala Sitharaman presents her first budget on 5 July, the fiscal math will be under scrutiny.

In its interim budget, the government estimated that the fiscal deficit would remain at 3.4% of GDP in 2019-20, the same as in 2018-19. However, the underlying assumption of growth in tax revenue was considered too ambitious, and at the same time, the government has been struggling to contain a ballooning subsidy bill. Consequently, the FM will be assessed on her ability to balance her budget despite such inclement challenges.

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As per the provisional estimates of Controller General of Accounts, the total receipts of the government in 2018-19 witnessed a shortfall of 1.46 trillion, compared with the revised estimates of 14.8 trillion for the same fiscal year. This was mainly on account of lower tax revenue collections.

“The formulation of the budget will be challenged by the actual fiscal outcomes for FY19 where revenue fell short of the revised estimates put out earlier. This will make it more challenging to even retain the interim budget numbers as it implies higher growth in revenue to justify the expenditure that was targeted," said Madan Sabnavis, chief economist at Care Ratings.

The government made up for the shortfall in revenue collections by underpaying subsidy bills, especially to the Food Corporation of India (FCI) by as much as 69,394 crore in 2018-19. This rollover of the food subsidy bill, which is 41% of the budget estimate, was the highest during the first five years of the National Democratic Alliance government.

The Comptroller and Auditor General (CAG) in a report released in January, had criticized the Modi-led government for borrowing through off-budget channels to finance capital and revenue spending in FY17, a practice that masks the true extent of fiscal and revenue deficits. The government should consider instituting a policy framework for off-budget financing, which should include a disclosure about its rationale and objective to Parliament, the report recommended.

In the interim budget, GDP growth in nominal terms was projected at 11.5% for 2019-20, which may be on the higher side, given that the Reserve Bank of India (RBI) has pared the real GDP growth as well as inflation.

A decline in expected GDP growth of 11.5% to 11% would also make tax collections less buoyant. Further, an unexpected spike in crude oil prices due to rising tensions between the US and Iran could also derail the fiscal math.

Though limited changes are expected in the expenditure allocations, aside from higher outlays for schemes such as PM-Kisan as it has now been expanded to cover all farmers, Sitharaman will be tempted to breach fiscal discipline and go for a demand stimulus given the slowdown in economic growth. However, there is limited space for maneuvering without additional sources of revenue.

One windfall gain—transfer of surplus from RBI—which the government was expecting before the budget has not materialized.

Now it is clear that the Bimal Jalan committee on the transfer of excess reserves of RBI will not be ready before the budget day since the committee has scheduled another meeting in July to sort out differences among the members, especially a dissent note by finance secretary Subhash Chandra Garg on the matter of methodology and timeline of transfer. However, a mid-year transfer of part of the reserves will come to the rescue of the government in a fiscally tight year.

Though the rolling targets for fiscal deficit included in the interim budget may not change in the 5 July budget, the fiscal glide path may alter for next fiscal after the 15th Finance Commission (FFC) submits its report in October.

“The trend for states’ share of tax revenues, which would crucially affect the net tax revenues of the central government, would also be determined by the FFC’s report," credit rating agency Icra said in a report earlier this month.

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