The budget always had two opposing goals to balance: to persist with fiscal discipline and yet splurge public funds for populist ends. The tragedy is fiscal discipline has lost rather thoroughly to populism. The published numbers say the deficit is 3.4 percent of the gross domestic product (GDP) for FY19 and FY20. Truth be told they are much higher.
Let us examine the numbers:
Firstly, the tax revenues are vastly over estimated for both FY19 and FY20. For FY19, direct taxes were expected to come very close to last year’s budgeted numbers of Rs 11.39 lakh crore (i.e. a growth of 16 percent over FY18). But today’s budget has scaled up that growth to nearly 21.5 percent, i.e. an over estimation of possibly Rs 50,000 crore. Likewise, for indirect taxes, economists were at best expecting a growth of 8-9 percent to under Rs 10 lakh crore. But the budget places the revised FY19 indirect tax estimates at Rs 10.43 lakh crore. All told tax collections can fall by between Rs 90,000 to Rs 1 lakh crore from what the budget estimates today.
To be sure, the government will cut its capex. The capital expenditure is estimated at Rs 3.1 lakh crore for FY19RE versus Rs 3 lakh crore in FY19BE. But there is a limit to capex cuts. The final deficit may still be Rs 50,000 crore more than the FY19 revised estimates, but for the additional Rs 50,000 crore, the government is borrowing from the National Small Savings Schemes. And then, there is a further Rs 1.4 lakh crore borrowed on the Food Corporation of India's (FCI) account.
If India had a fiscal council, it would have probably stated the fiscal deficit for this year at 4 percent of the GDP.
The FY20 math is even more spurious. If the current YTD tax collections are only 11.5 percent higher than FY18, the budget is assuming a growth of 14.9 percent in taxes next year, over and above an impossible-to-achieve 19.5 percent growth in taxes this year. It is pointless to even go into the extent of make believe in the fiscal deficit calculations of FY20, not the least because they are bound to change when the final budget is presented after the polls.
There are many who squabble that fiscal consolidation is but an orthodoxy that’s worth sacrificing at the altar of growth. But it is hardly an orthodoxy. The impending higher borrowing by the government has already pushed up the yields in the bond market – yields on the 10-year bond have risen by 12 basis points to 7.38 percent. Before the first half borrowing of next year is done, this yield may well touch 7.6 percent, thus pushing up the cost of borrowing for the private sector.
One basis point is a hundredth of a percentage point.
The FY20 borrowing by states and centre is truly onerous. The central government will borrow Rs 7.1 lakh crore and the states another Rs 5.5 lakh crore. That is a tall Rs 12.5 lakh crore or 25 percent higher borrowing than in the current year. Most banks already have close to 30 percent of their deposits in government bonds against an Statutory Liquidity Ratio (SLR) requirement of 20 percent. If the RBI for any reason is unable to buy 80 percent of the government’s net borrowing like it is doing this year, yields can fly even higher.
The FY20 budget is intended as a fiscal stimulus. It intends to put Rs 75,000 crore more in the hands of farmers and over Rs 20,000 crore more in the hands of small tax payers. That’s Rs one lakh crore fiscal stimulus. Prudence would require that monetary stimulus not be given along with fiscal stimulus. But even if the RBI gives a rate cut in February or April, it is unlikely that cost of borrowing for companies will fall, since yields on long term bonds may remain high. The constant refrain that RBI is keeping the real rates high is thus hollow. Government borrowing is the real culprit.The FY20 budget is being seen as an expansionary budget, as a growth stimulant, given the boost to consumption. But chances are with the world economy slowing and the domestic cost of money poised to rise a bit, economic growth may actually slow in FY20. Nomura’s economist Sonal Varma is already forecasting GDP to fall to between 6.5-7 percent in FY20.