Budget attempts to optimise stimulus within a credible fiscal framework

Saugata Bhattacharya

As we had expected, the FY21 Union Budget used the room for slippage provided by both the original FRBM Act and the N.K. Singh Review Committee, by taking FY20 fiscal deficit from the budgeted 3.3 percent of GDP to 3.8 percent. Within prudent limits, it recognized the need for counter-cyclical fiscal support and invoked an escape clauses allowing slippage due to structural reforms with unanticipated fiscal consequence, citing the corporation tax cut. The FY21 fiscal deficit is pegged at 3.5 percent, also as anticipated.

Second, the underlying projections for revenues (and consequently expenditures) are, while somewhat optimistic, within the bounds of feasibility. With somewhat higher inflation likely, FY21 nominal growth is projected to be 10 percent. Allowing additional buoyancy in most tax heads, incremental revenues are certainly possible. The higher non-tax revenues will also hopefully be realized. Capital receipts are budgeted at a high Rs 2.25 lakh crore, but an LIC IPO will likely help in realizing this, together with disinvestment of not just public owned companies, but also monetizing the assets of various infrastructure and project SPVs. The budgeted Rs 89,000 crore of dividends and interest as non-tax revenue receipts will also likely be met through RBI payments -- the profits from higher foreign exchange reserves, falling interest rates and OMO operations are likely to result in larger transfers from the central bank.

The direct tax revenue targets, though, look a little optimistic and seem to have built in excessive buoyancy. Moreover, these are based on relatively aggressive FY20 revised projections, which might be difficult to meet. Indirect tax collection growth targets seem more reasonable. Hopefully, data analytics will help to improve compliance.

Expenditure growth has been calibrated to these revenue projection, with slightly larger allocations to capital spends. One way of containing expenditure is to enhance the efficiency of government spending, as has been stressed in the Budget: “a fundamental overhaul of Central Sector Schemes and Central Sector Schemes is necessary … to ensure that scarce public resources are spent optimally”. A relook and rationalization of government programmes to cut overlaps, duplication of spends and waste is, and should be, an ongoing initiative and should be implemented more aggressively, irrespective of the stage of the economic or fiscal cycle.

Funding the deficit is budgeted with reasonable borrowings. Market borrowings in FY21 are projected to be less than street expectations, given the high redemptions of maturing papers. The Government is proposing a larger pool of investors for government securities, including the Bond ETF and increased access to the Gsec market for foreign investors of various categories. RBI might also lend some support via buying bonds through OMOs, but this will be feasible to only a limited extent.

In addition, extensive use of shorter term borrowings like Ways and Means Advances (WMAs) and T-bills will allow for higher spending. Higher borrowings from to the National Small Savings Fund (NSSF) and shifting some of the expenditure heads to the NSSF are other ways of keeping spends higher without a concomitant rise in borrowing costs, although each of these channels will entail a cost, either in impeded transmission or higher than prudent liquidity levels or some other risks.

Saugata Bhattacharya is Senior Vice President (Business and Economic Research), Axis Bank. Views are personal.