While the fiscal picture may not be as bleak so as to invite the ire of the rating agencies, the government will need an extremely supportive capital markets in FY19 to keep things under control.
With less than three weeks for the Union Budget, speculation about the fine print has begun. The fiscal math suggests that the government may not be able to adhere to the FRBM (fiscal responsibility and budget management) targets for FY19. That is because the government will have to be mindful of electoral politics ahead of the 2019 elections even as it tries to revive the economy. And while the fiscal picture may not be as bleak so as to invite the ire of the rating agencies, the government will need an extremely supportive capital markets in FY19 to keep things under control. Hence, any move that can dampen long-term market sentiment looks unlikely at this stage.
The worrisome fiscal picture in FY18 so far
In the first eight months of the current fiscal, the deficit picture looked worrisome as the government front loaded its expenditure, private capex was weak and revenues were short of projections.
On the revenue side, the shortfall in GST collection, lower dividend from RBI and lower revenue from telecom (due to hyper competition and absence of spectrum auction) were the key culprits. Disinvestment receipt was the sole bright spot, thanks to the buoyant capital market.
On the expenditure side, the government spent much of the earmarked funds in the first half of the year. It had little choice, given the disruption caused in the economy by demonetisation and GST, and muted private sector spending.
Will FY18 end on a better note?
However, the year may still end on a positive note. Direct tax collection has picked up, and beyond the reported disinvestment receipts of Rs54,000 crore (budget target of Rs 72,500 crore) the government still has ground to cover with follow-on offer of NMDC (Rs 1500 crore) and the stake transfer of HPCL to ONGC that is likely to fetch close to Rs 45,000 crore.
All said, Arun Jaitley & Co may struggle to meet the 3.2% fiscal deficit to GDP ratio this year; the number to be close to 3.5%.
FY19 adds a new complication to the whole equation – the compulsions of electoral politics and need to therefore focus on the rural economy, the latter assuming greater importance in light of the feedback from the recently concluded state elections.
Turning to revenues in FY19, on the corporation tax side, tax rates are likely to be reduced (necessitated now by the move of US to reduce tax rate). On the personal income tax front, enhanced limit of investment deduction under Section 80C looks on the cards. Our assumptions factor in the revenue suppression on these counts.
With non-tax revenue (coming mainly from dividend and telecom receipt) likely to remain muted, disinvestment receipt will have to do the heavy lifting. We expect it to be of a similar order as FY18.
Revenue expenditure should remain buoyant with a focus on rural, social sector and employment creation.
We expect the fiscal deficit to GDP ratio in FY19 to be close to 3.3% as against 3% laid down in the fiscal roadmap. If the government pushes itself to stick to the target of 3% (which translates into an absolute lower deficit number of Rs 74,000 crore) either the disinvestment receipt has to be much higher than our own optimistic assumptions or there be drastic reduction in capital expenditure which could hurt growth in an election year.
However, even to achieve a respectable fiscal deficit number of 3.3% in FY19, the stock market has to be supportive, as disinvestment receipt will remain the joker in the pack. The unlisted names that are likely to be considered for disinvestment are Air India, IRCTC, Airport Authority of India (AAI), Hindustan Aeronautics (HAL), ONGC Videsh (OVL) etc. In addition, government can further offload stakes in listed companies where it still has a large holding like MMTC, NLC India, India Tourism Development Corporation, Coal India, NBCC, Rashtriya Chemicals & Fertilizers Ltd, SAIL etc.So a buoyant market in FY19 is in the interest of the government as much as it is for investors.
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