The debate on whether the interim budget was populist (owing to the direct income support for land-owning farmers and higher income tax exemption threshold of Rs. 5 lakhs) and was akin to a full budget (which set a new precedent for election year budgets) continues. In our budget-day note (Interim Budget FY20: Fixed Income Takeaways), we looked at the likely incremental fiscal impulse, higher scheduled borrowing and the key takeaways. In this note, we dig deeper to evaluate how the fiscal situation could eventually play out in FY19 and FY20. For this, we look at the year-to-date revenue/expenditure, year-on-year growth estimates and the conditions under which the estimates could be met. While we gauge how realistic the budget is, we also focus on the accounting details and the rising off-budget transactions.
FY19 RE vs. BE – Corporate tax strong but Income tax and GST estimates optimistic; Keep an eye for details and off-budget expenditure
1. Net tax revenue stays flat, despite a fall in gross tax revenue (read GST), essentially due to lower transfer to states. This is not just lower CGST-transfer owing to lower collections. Surprisingly, IGST transfer to all states is shown as zero in FY19 Revised Estimate (RE) vs. 21,000cr in FY19 Budget Estimate (BE).
2. Within gross tax receipts, Corporate Tax estimates could be met but Income Tax and GST could still disappoint.
– Corporate tax has been growing strongly this year. Further, the collection for a full FY was 1.48-1.55 times the April-December collections, in each of the previous four years. The ratio now required to meet FY19 target is very similar at 1.57.
– Income tax growth has been well below FY19 target. The collection for a full FY was 1.51-1.56 times the April-December collections, in each of the previous four years. The ratio now required to meet FY19 target is higher at 1.75.
– FY19RE CGST of Rs. 5.04 lakh crore assumes a monthly run rate of Rs. 42,000 crores vs. ~ Rs. 37,600 in April-January (CGA numbers for January 2019 are IDFC MF estimates based on PIB data). With only two months to go, we could see a shortfall of Rs. 8-10 thousand crores. However, higher retained-IGST and/or sharing of surplus compensation cess between the centre and states could offset this.
3. Overall non-tax revenue stays flat based on the assumption of ~ Rs. 20,000cr extra dividend from the RBI.
4. Disinvestments have been slow, but catching up, with ~ Rs. 34,200cr completed in April-December vs. the retained target of Rs. 80,000cr (43% of target completed)
5. Expenditure through the budget is only marginally higher, due to higher Capital expenditure. However, off-budget expenditure, better known as ‘Resources of public enterprises’ (excluded from the fiscal deficit calculation) is higher by ~1.6 lakh crore (0.9% of GDP). This is primarily on account of borrowing from Food Corporation of India (FCI), over and above the food subsidy provided by the government through the budget.
– Further, funding through ‘Other’ sources apart from Internal Resources, Bonds/Debentures and ECB/Suppliers credit increased by Rs. 1 lakh crore (0.5% of GDP).
– Such heavy and indirect off-budget expenditure questions the quality of the budget and the headline fiscal deficit number. Inclusion of FCI off-budget expenditure, state fiscal deficit and borrowings by the central and state PSEs push the fiscal deficit much higher.
6. Capital Expenditure through the budget could eventually fall slightly short, as it did in FY18,particularly when CapEx through PSEs has been revised much higher (although latter is primarily for FCI).
7. Despite the additional Rs. 20,000 crore expenditure on the direct income support for farmers, overall revenue expenditure for FY19BE and FY19RE is the same. On closer examination, while expenditure on ‘Central Sector Schemes/Projects’ increased by 19,200 crore (due to the farm package), ‘Other grants/loans/transfers’ reduced by Rs. 41,500 crore. This is owing to a cut in ‘Transfer to GST Compensation Fund’ (under the Department of Revenue) of Rs. 38,300 crores.
Figure 1: Budget and year-to-date numbers
Source: CEIC, India Budget, IDFC MF Research. Note: FY19 y/y growth for Central GST, Integrated GST and GST compensation cess is calculated based on annualised FY18 numbers.
FY20BE – achievement of FY19RE holds the key
1. Gross tax revenue growth is estimated to be slower in FY20, partly due to the higher income-tax-exemption threshold of Rs. 5 lakh
2. Total central government GST collections is estimated to grow 18% y/y (21% for CGST) vs. nominal GDP growth of 11.5%. This assumes a monthly run rate of Rs. 63,400 crores in FY20 vs. ~Rs. 48,100 in April-January of FY19. This is not impossible but can be achieved only if much stronger compliance (invoice matching) is enforced and improves collections and, as anecdotal evidence suggests, the still-occurring CGST-set-off against the previous regime CENVAT on capital goods is completed at the earliest.
3. Non-tax revenue growth slows as the jump in receipts from dividends and economic services (mainly petroleum, roads & bridges and communication-services/spectrum-auctions) falls. Upside risk is the transfer of higher RBI surplus, subject to the decision of the recently constituted RBI Committee on Economic Capital Framework.
4. Although difficult to say whether the disinvestment target is realistic, given the current pace and quality, better and early planning next year should definitely help.
5. The recent preference for using higher portion of small savings to fund the deficit looks set to continue in FY20.
6. Growth in expenditure through the budget is set to slow as CapEx slows sharply and revenue expenditure picks up mildly.
7. Off-budget capital expenditure is estimated to fall from FY19 levels, but given the sharply higher FY19RE numbers (due to FCI borrowing), this may not materialise.
It is borrowing that finally matters but government guidance could improve.
1. Both gross and net borrowing (excluding switch, buyback and short-term borrowing) falls in FY19 vs. budget estimates, but rises vs. the numbers announced during the year.
2. Recent government guidance on gross borrowing has not been the best, owing to multiple and frequent revisions during the year (Figure 2). This could improve.
3. In FY20, bond supply from gross borrowing increases sharply and so does redemptions to ease following year pressure. Including buybacks, net borrowing is estimated to stay flat.
Figure 2: Government guidance on gross borrowing
Source: CEIC, India Budget, IDFC MF Research. Note: 1) Gross borrowing excludes switch, buyback and short-term borrowing, 2) The month of announcement is indicated in brackets in the X-axis
Key takeaways
1. Within the revised estimates for FY19, Income Tax and GST collections appear a bit optimistic, while corporate tax collections are robust and should meet target.
2. This does not mean FY19 actuals exactly slip but a) slightly different revenue mix or b) proportionate expenditure cuts if tax revenues disappoint are possible.
3. Expenditure through the budget is only marginally higher in FY19, keeping the fiscal deficit at 3.4%, but expenditure through PSEs has risen.
4. Important to note are the accounting details such as a) IGST transfer to all states being shown as zero in FY19RE vs. 21,000cr in FY19BE, b) spike in off-budget expenditure (0.9% of GDP), particularly for FCI, c) the increased preference for funding these expenditures through ‘Other’ channels and d) the sharp cut in ‘Transfer to GST Compensation Fund’ (under the Department of Revenue) to keep revenue expenditure flat despite the outgo towards the farm package in FY19.
5. For FY20, meeting receipts would depend on increased GST compliance (invoice matching), RBI dividend transfer and realised disinvestments, but FY19 targets being met is even more crucial. If tax revenues eventually fall short in FY19, FY20BE y/y estimated growth would become higher and thus more difficult to achieve.
6. Finally, we are faced with higher-than-expected gross borrowing in both FY19 and FY20, but more importantly, there is scope for improvement in government guidance.
While the government has retained the glide path towards the fiscal deficit of 3% in FY21, the feasibility of achieving this has to be evaluated as the actual expenditure on newly announced schemes play out and the full budget is presented by the newly elected government in June/July of this year.
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