India Ratings and Research’s (Ind-Ra) calculation shows that the slippage in central government’s fiscal deficit in FY19 is likely to be INR399 billion. Fiscal deficit in FY19 is estimated to be INR6.67 trillion as against the budgeted INR6.24 trillion (FY18 (revised estimate, RE): INR5.92 trillion). This translates into fiscal deficit/GDP of 3.5% for FY19 compared to the budgeted estimate of 3.3%. This means that FY19 will be the third consecutive year in which fiscal deficit/GDP will be 3.5%.

Ind-Ra-New Delhi-23 November 2018: India Ratings and Research’s (Ind-Ra) calculation shows that the slippage in central government’s fiscal deficit in FY19 is likely to be INR399 billion. Fiscal deficit in FY19 is estimated to be INR6.67 trillion as against the budgeted INR6.24 trillion (FY18 (revised estimate, RE): INR5.92 trillion). This translates into fiscal deficit/GDP of 3.5% for FY19 compared to the budgeted estimate of 3.3%. This means that FY19 will be the third consecutive year in which fiscal deficit/GDP will be 3.5%.

The Finance Bill 2018 says that the “central government shall take appropriate measures to limit the fiscal deficit up to 3% of GDP by 31 March 2021.” The Finance Bill also states the following: “The central government shall prescribe the annual targets for reduction of fiscal deficit for the period beginning from the date of commencement of Part XV of Chapter VIII of the Finance Act, 2018, and ending on 31 March 2021, provided that exceeding annual fiscal deficit target due to ground or grounds of national security, act of war, national calamity, collapse of agriculture severely affecting farm output and incomes, structural reforms in the economy with unanticipated fiscal implications, decline in real output growth of a quarter by at least 3% points below its average of the previous four quarters, may be allowed for the purposes of this section.”
The first half of FY19 is over, and none of the aforementioned exceptions are likely to materialise during the remaining part of the current fiscal. Despite this, the central government is once again staring at fiscal deficit overshooting the budgeted estimate for FY19.

The pressure on government finances is mainly arising from the revenue side, particularly from indirect taxes and non-tax revenue. Ind-Ra’s estimate suggests a tax revenue shortfall of INR224 billion, which is expected to originate from indirect taxes. Since 1 July 2017, a large portion of indirect tax collection has been subsumed in goods and services tax (GST). Although the introduction of e-way bills has helped the government plug leakages in GST collection, aggregate indirect tax collections (union excise duties, customs, service tax and GST) grew only 4.3% during 1HFY19 as against the budgeted growth of 22.2% for FY19.

In FY19, non-tax revenue is expected to be INR162 billion lower than the budgeted estimate of INR2.45 trillion. The shortfall in non-tax revenue is likely to emanate from a) lower dividend/profit pay out by the RBI/nationalised banks/financial institutions, b) lower non-tax revenue receipts from communication services, and c) lower disinvestment receipt. The RBI provided an interim dividend from their FY18 profits to the government in March 2018. As a result, the dividend receipt is likely to be lower in FY19. Nationalised banks too are struggling under the burden of non-performing assets. For FY19, the government has budgeted INR800 billion from disinvestment receipts. However, till end-October 2018, the disinvestment receipt amounted to only INR152.47 billion. Although the disinvestment process may gather steam from December 2018, including select government companies buying the government’s stake in government companies (as Oil and Natural Gas Corporation Limited did in the case of Hindustan Petroleum Corporation Limited (‘IND AAA’/Stable) last fiscal), Ind-Ra believes the government is unlikely to meet its disinvestment target.

Revenue expenditure growth in 1HFY19 is marginally lower than the budgeted figure. However, the situation is likely to change due to a steep increase in the minimum support price of kharif crops and the implementation of Ayushman Bharat.

By reducing capital expenditure, the government will again try to reduce the adverse impact of both increased revenue expenditure and shortfall in receipts on the fiscal deficit.
 

Ind-Ra’s Updated Economic Outlook for FY19

(%)

FY14

FY15

FY16

FY17

FY18

FY19

Gross value added at FY12 prices

6.1

7.2

8.1

7.1

6.5

7.2

 - Agriculture

5.6

-0.2

0.6

6.3

3.4

3.5

 - Industry

3.8

7.0

9.8

6.8

5.5

7.9

 - Services

7.7

9.8

9.6

7.5

7.9

7.8

Real GDP

6.4

7.4

8.2

7.1

6.7

7.3

 - Private final consumption expenditure

7.3

6.4

7.4

7.3

6.6

7.7

 - Government final consumption expenditure

0.6

7.6

6.8

12.2

10.9

7.9

 - Gross fixed capital formation

1.6

2.6

5.2

10.1

7.6

8.3

Nominal GDP

13.0

11.0

10.4

10.8

10.1

12.5

Average wholesale inflation

5.2

1.3

-3.7

1.7

2.9

4.5

Average retail inflation

9.4

5.9

4.9

4.5

3.6

4.3

Year-end interest rate (10-yr G-sec)

8.8

7.8

7.5

6.7

7.4

7.8-7.9

Average exchange rate (INR/USD)

60.50

61.14

65.47

67.07

64.45

69.79

Fiscal deficit (central government, % of GDP)

4.4

4.0

3.9

3.5

3.5

3.5

Current account deficit (% of GDP)

1.7

1.3

1.1

0.6

1.9

2.7

Source: Ind-Ra, Central Budget, CSO and RBI


 

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  • Dr Devendra Pant

    Chief Economist and Head Public Finance
    India Ratings and Research Pvt Ltd 601-9 Prakashdeep Building 7 Tolstoy Marg New Delhi 110001
    +91 11 43567251

    Dr. Sunil Kumar Sinha

    Principal Economist and Director Public Finance
    +91 11 43567255

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