The new finance minister had entered the budget exercise with very large constraints. The FY19 actual numbers (as per data from the Controller General of Accounts) had come in lower by ~Rs. 1.4 lakh crores (vs. FY19 Revised Estimate (RE)), together for direct taxes and Goods and Services Tax (GST) collections. This made the FY20 interim budget estimates look very high and difficult to achieve. The key question as we approached today’s budget was how part of this shortfall will be factored into the FY20 estimates and whether artificial expenditure compression will be resorted to.
In the final budget, FY20 estimates (vs. the interim budget) were cut by Rs. 51,000 crores for income tax and Rs. 98,000 crores for total GST collections. However, no overall expenditure cuts or higher borrowing is planned. This reduction in revenue estimates is planned to be met by higher customs (Rs. 11,000 crores), excise duties (Rs. 40,000 crores), non-tax revenues (Rs. 41,000 crores from higher RBI and nationalised bank dividends, possible spectrum auctions, etc.) and higher non-debt capital receipts (Rs. 17,000 crores from disinvestments, etc.).
The above plan to raise additional revenue will be met through the government’s plan to raise a) customs duty on gold and other precious metals from 10% to 12.5%, b) customs duty on various other items including auto parts, metal fittings, etc. and c) special additional excise duty and Road and Infrastructure Cess, each by Rs. 1 per litre on petrol and diesel (in the context of softer crude oil prices). A nominal basic excise duty is also being imposed on tobacco products and crude.
Highlights of the FY20 final budget are:
FY20 fiscal deficit was lowered to 3.3% of nominal Gross Domestic Product (GDP) from the February interim budget number of 3.4%.
FY20 nominal GDP is pegged at 12% year on year (y/y) growth vs. FY19 Revised Estimate (RE)
The amount of gross and net borrowing through dated securities were unchanged at Rs. 7.10 lakh crores (24.3% y/y) and Rs. 4.73 lakh crores (11.9% y/y) respectively
Total net revenue receipts are now pegged at Rs. 19.63 lakh crores vs. Rs. 19.78 lakh crores earlier, while total expenditure stays about flat at Rs. 27.8 lakh crores
Thus, direct taxes (income and corporate taxes) are now pegged at Rs. 13.35 lakh crores vs. 13.80 lakh crores in February and indirect taxes (GST, customs and excise duties) are at Rs. 11.19 lakh crores vs. Rs. 11.66 lakh crores previously
Note: All the above year on year (y/y) numbers are for FY20 final budget estimate vs. FY19 revised estimate
Figure 1: The FY2020 final budget numbers
Source: India budget documents
Furthermore, the government has decided to start raising a part of its gross borrowing programme in external markets in external currencies. While the bond market has already been positive surprised by a net fiscal consolidation as well with gross borrowing number remaining intact from the interim budget, this will further help balance demand –supply in government bonds. Finance secretary has said first bond may take 3 – 5 months and that they will target borrowing 10 – 15% of gross borrowing offshore.
Takeaways
As described above, the FY20 final budget provided an exceptional challenge to sound credible without deviating heavily from the interim budget targets. Given this, the finance minister has delivered a remarkable balancing act. As with almost all budgets, revenue numbers will still get challenged especially given the ongoing economic slowdown. However, this is a creditworthy optimising given constraints and leaves the bond market reasonably satisfied. Also noteworthy is the fact that Governor Das, alongside 2 other MPC members, has seemingly been sympathetic towards some fiscal expansion and would likely have not considered this as a constraint for further easing. However, now with the finance minister actually showing further consolidation, the trigger for further monetary easing becomes even stronger. This alongside RBI’s move to positive liquidity (core system liquidity is already around INR 80,000 crores positive and is likely to go towards INR 2,00,000 crores by September post RBI dividend) and the global backdrop of sharply lower yields paints a continued bullish environment for quality interest rates.
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