Finance minister Piyush Goyal admitted fiscal slippage for the second consecutive fiscal year in 2018-19 and revised the government’s fiscal deficit target upward of 3.1% of gross domestic product (GDP) for 2019-20 to 3.4% of GDP, but the unreasonable assumption of tax buoyancy and ambitious disinvestment targets make the numbers look dodgy.

Gene Fang, associate managing director, Sovereign Risk Group, Moody’s Investors Service, wrote in a note that the fiscal slippage is credit negative for the sovereign rating. “India’s high debt burden remains its biggest credit challenge and is not expected to diminish rapidly. India’s low income levels lead to significant development spending needs and constrain the scope of tax base broadening," he said.

Despite a reduction of the GST collection target by 1 trillion in 2018-19, the government has assumed 18.2% growth in GST collections in 2019-20. This led to the assumption of overall tax revenue growth of 14.9% in 2019-20, even as nominal GDP growth is assumed to be only 11.5% during the same period.

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In its fiscal framework document attached to the budget, the finance ministry admitted that accrual of the full benefit of GST reforms and revenues is expected to take some more time and, therefore, the stabilization phase is expected to continue in 2019-20. “The projections of direct tax collections is a base case scenario that may vary if there are structural changes like in tax rates or slabs or any of the provisions in the Income Tax Act, 1961," the document observed.

Goyal in his maiden budget announced that those having taxable income not exceeding 5 lakh will no longer need to pay tax with an estimated revenue impact of 18,500 crore.

Radhika Rao, economist, DBS Group Research, said the breakdown revealed that the government has built in aggressive revenue assumptions for FY20, despite factoring in a slowdown in nominal growth. “As a percentage of GDP, gross tax revenues are forecasted to improve by 0.2% of GDP, with the bulk of the lift seen coming from higher income tax collections, as well as GST revenues," she said.

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Rao said with lack of fresh revenue-generating measures in the interim budget, much of the funding is likely to arise from higher markets-based borrowings. Gross market borrowing in 2019-20 is budgeted to grow 33.1%, which could result in higher bond yield, and make a policy rate cut by the central bank difficult.

Despite high oil prices in 2018-19, petroleum subsidy has actually been reduced by 100 crore, tacitly signalling a large amount of the subsidy shifting to the next fiscal year. Last month, the Comptroller and Auditor General of India (CAG) had indicted the Narendra Modi government for borrowing through off-budget channels and deferring subsidy bills to the next year to show lower deficit numbers. The CAG had said the huge off-budget financing lacks transparent disclosures and could pose fiscal risk in the long term in case the entity that raises the funds fails to meet debt servicing.

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The quality of government spending is also projected to deteriorate with capital expenditure projected to grow only at 6.2% in 2019-20 against 20.3% in the previous fiscal year. The government has set a disinvestment target of 90,000 crore in 2019-20, despite having realized only 35,533 crore so far, against the budget target of 80,000 crore in 2018-19. Except in 2017-18, when it grossed more than 1 trillion through disinvestment, the government has failed to meet its ambitious disinvestment targets.

Dharmakirti Joshi, chief economist, Crisil Ltd, said divestments for 2019-20 will need to be front-loaded to achieve the ambitious target of 90,000 crore and tax collections aggressively pursued. “This will be important to keep government bond yields in check."


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