Fitch Group arm projects fiscal deficit to slip to 3.6% in 2019-20

Fitch Ratings | On May 26, the rating agency forecasted a 5 percent contraction of Indian economy in the current fiscal. This is substantially lower than 0.8 percent growth for 2020-21 fiscal projected in April. (Image: PTI)

Fitch Solutions, the research arm of Fitch Group, Monday projected the government's fiscal deficit to overshoot the budgeted target by 0.2 percent to 3.6 percent of GDP in 2019-20 fiscal. It said that 2019-20 Budget appears to show a strong populist bent in the run up to the General election due by May 2019.

It is on expected lines considering that the ruling Bharatiya Janata Party (BJP) is looking to shore up its popularity following its loss of three strongholds in agrarian states at the November/December 2018 state legislative assembly elections, it stated.

"We believe that expenditure growth will exceed the government's projections, giving our expectation for high election spending and the budget speech's repeated emphasis that 'if necessary, additional funds will be provided'. Additionally, the government's revenue growth projections also appear too optimistic given its sweeping tax rebates for the middle class and small business," Fitch Solutions said.

Accordingly, Fitch Solutions revised its forecast for the central government fiscal deficit to come in at 3.6 percent of GDP in FY 2019-20, from 3 percent previously, which reflects our expectation for a wider fiscal deficit in FY 2019-20 versus FY2018-19.

"We believe that continued fiscal stimulus by the central government will see the government miss its goal of lowering its fiscal deficit to 3 percent of GDP by FY2020-21," it said in a note titled 'India's Populist FY2019-20 Budget To Delay Fiscal Consolidation'.

The central government plans to spend a total of Rs 27.8 lakh crore in fiscal 2019-20, a 13.3 percent increase over the 2018-19 revised budget estimates.

"By contrast, we are looking at expenditures rising at a quicker rate at around 13.8 percent, given the upcoming Lower House election, and the ruling BJP's desire to shore up support on the ground.

"Although agriculture, rural development and transport infrastructure remain the largest expenditure areas, the budget speech focused heavily on agriculture, social welfare, education, and healthcare, likely aimed at appealing to members of scheduled castes and scheduled tribes, which form 25 percent of the total population, and farmers, which account for 58 percent of India's labour force," Fitch Solutions said.

It said agriculture spending as a proportion of total expenditures grew to 5.4 percent in 2019-20, from 3.5 percent in the 2018-19 revised budget estimates, which suggests a populist shift in the government's expenditure patterns.

The interim Budget for 2019-20 doled out a scheme under which farmers holding up to 2 hectares of land would get an annual payout of Rs 6,000 -- a move intended to benefit about 12 crore farmers, among other measures for middle-class taxpayers.

However, there was a 0.1 percent slip in the fiscal deficit estimate for the current financial year to 3.4 percent.

While presenting the Budget, Finance Minister Piyush Goyal had said the government has provided Rs 20,000 crore in 2018-19 and Rs 75,000 crore in 2019-20 for providing income support to farmers, which has led to the slippage in the fiscal deficit.