The Union budget for 2020-21 is much more than a statement of India’s current fiscal health. It places before us the government’s fiscal response strategy to the economy’s severest slowdown in a decade. Experts were divided over whether the government must spend its way out of the slowdown or stay austere and not take its eyes off structural (supply-side) reforms. It has chosen the middle ground, which was the pragmatic thing to do.

Given the limited fiscal room, the budget has continued to script the reforms narrative, increased budgetary support to capex while reducing reliance on extra-budgetary spending. Steps to ease friction in the financial sector and focus on infrastructure and agriculture markets will require continuous attention, and will bear fruit in the coming years if pursued relentlessly.

With that broad understanding, let’s size up the budget under two sub-heads: 1) budgetary assumptions and fiscal arithmetic and 2) post-budget growth outlook.

The fiscal arithmetic

As expected, the final fiscal deficit print has veered off the present Fiscal Responsibility and Budget Management (FRBM) path. At 3.8% of gross domestic product (GDP) vs the budget estimate of 3.3% for fiscal 2020, it leaves little room for big spends.

To address that, the government has tried to create fiscal room for 2020-21 in two ways—first, by relaxing the deficit target from the committed rolling target mentioned in the last budget, and second, by looking to mobilize revenue aggressively via asset sales. Some relaxation in target to nudge up growth was inevitable.

The deviation is intended to be transient and pushes ahead the aspirational target of fiscal deficit at 3% of GDP beyond fiscal 2023, for which the rolling target is now set at 3.1% of GDP. Given that this target has been achieved only once in the last three decades, why not substitute it with a more realistic one? Switching to a realistic target is good from the fiscal credibility point of view.

Two, the budget sets the fiscal deficit target at 3.5% in the next fiscal as against 3% set earlier. So, fiscal consolidation has been pushed ahead to make way for increased spending.

But can the budget meet this year’s deficit target without cutting expenditure? In the last two budgets, revenue collections were way short of target. Tax collections (fiscal 2020 revised estimates) fell 3% short of the budget target and the fiscal slippage was minimized by cutting expenditure mainly on the revenue account, considering capital expenditure is set to exceed the budget target.

That said, the nominal GDP growth assumption of 10% for fiscal 2021 appears achievable as the economy is expected to mildly recover and inflation, too, is likely to stay above the 4% mark.

But the tax revenue growth of 12% implies tax buoyancy of 1.2 versus 0.5 achieved this fiscal. So, achieving the target will require extra tax efforts as this is above the last 10 years’ average of 1.

The tough ask is the ambitious divestment target of 2.1 trillion, which could slip unless the government front-loads its efforts. In fiscal 2020, the government is set to miss its divestment target by 38%, despite healthy market conditions. If that repeats, it could add another 0.35 percentage point to the budget deficit in fiscal 2021.

Post-budget outlook

From our perch, achieving over 6% growth in fiscal 2021 appears a tall order. But if there is one lesson learnt in the last decade, it is that policymakers and market participants find it hard to anticipate the timing and speed of a turnaround. Growth forecasts are heavily influenced by the macroeconomic environment prevailing at the time they are made.

With that caveat, we still expect GDP growth at 6% assuming normal monsoons and Brent at $60-65 per barrel. Monetary policy would provide some support to growth, mainly via improved transmission.

The budget has maintained focus on schemes with higher propensity to whet consumption. Capital spending continues to get more attention, and rightly so.

On the inflation front, we expect the consumer price index (CPI)-based inflation to end this fiscal at over 4.5%. CPI inflation touched 7.4% in December, largely due to volatile components such as food. However, the impact of transitory factors (vegetable prices) should correct and we expect retail inflation to average 4% in fiscal 2021. The budget is non-inflationary, as it does not have the spending muscle to push growth above potential in the near term.

Net-net, the recovery in fiscal 2021 will benefit from weak base effect, but at best, it will be a grind up. The limited ability of fiscal and monetary policies to juice up the economy, slow resolution of stress and risk aversion in the financial sector, and a slowing and inward looking global economy are, after all, a lot to contend with at one go.

Dharmakirti Joshi is chief economist at Crisil.

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