Not so fiscally fit, but deficit figure seems to be in shape

NEW DELHI: The most controversial sources of potential resource mobilisation for the NDA government in 2019-20 do not figure in the Budget documents. For the first time, an Indian government is open to borrowing abroad as part of its gross borrowing programme. The Budget documents did not account for it, but a mere expression of intent was enough to lower the yields here on government securities.
In addition, there is a possibility of a fiscal windfall through the transfer of capital reserves from the Reserve Bank of India.
The roadmap to a $5trillion economy by 2024 is not devoid of serious challenges. Finance minister Nirmala Sitharaman has forecast a fiscal deficit of 3.3% of GDP in 2019-20. Growth in nominal GDP is expected to be 12%, taking it to Rs 211 lakh crore. The finance minister has accounted for an increase in tax revenue of 9.5%, which is lower than the growth of GDP. On this count, the target is realistic.
On the non-tax revenue side, government expects a sharp increase of 28% to Rs 3.13 lakh crore, with a large share coming from dividends of public sector undertakings (PSUs) and RBI’s surplus. Another area where the Budget anticipates a large increase is through disinvestment proceeds, which are expected to reach Rs 1.05 lakh crore. The target is a sharp increase over the previous year, but in line with what government earned in 2017-18. With strategic disinvestment in PSUs on the agenda, and the role public sector financial intermediaries play, the target should be met.
Given that the government is open to the idea of sovereign borrowing abroad, there needs to be more focus on the extent to which public sector companies are used to meet government’s capital expenditure. In 2018-19, between the Budget estimate and revised estimate there was a 28% increase in the use of public sector resources. For the current year, the Budget expects public resources to be Rs 5.37 lakh crore, which is about 12% lower than last year.
Even if this target is adhered to, public sector companies will contribute about 61% of government’s proposed capital expenditure for 2019-20. The contribution of public sector enterprises has steadily increased in the recent past, undermining the quality of fiscal consolidation.
On the expenditure side, the Budget expects an increase of 13.39% to Rs 27.86 lakh crore. The notable change in expenditure over the last year is the addition of the income support scheme for farmers.
In 2019-20, it is expected to cost Rs 75,000 crore. Beside this scheme, there has been an increase in subsidies by 11.53% to Rs 3.38 lakh crore, most of which is accounted for by food subsidy.
The Budget arithmetic is reasonable and the finance minister should be able to meet her fiscal deficit target. Yet, it does not mitigate anxiety about fiscal stress as some of the large items such as the proposed Rs 70,000 crore bank recapitalization are off the balance sheet in the form of bonds. This will come under more scrutiny in the future.