As the new Finance Minister Nirmala Sitaraman is preparing to present the first budget of the new Modi government on 5 July 2019, India Ratings and Research (Ind-Ra) believes the most daunting task would be to put the Indian economy on an accelerated growth path while navigating through a myriad of challenges. The fiscal space available is limited as fiscal deficit has already been projected at 3.4% of gross domestic product (GDP) in the FY20 interim budget. Based on the current trend in GDP and tax-/non-tax revenue growth, Ind-Ra believes adhering to the target will be difficult without squeezing expenditure.

Therefore, it would be interesting to look at the measures the budget would announce to expand the tax base and resolve the tax revenue currently in disputes. Even after several simplifications/alterations, India’s direct tax laws/rules are still complex and replete with various types of exemptions. The agency hopes a new direct tax code to simplify tax legislation, remove exemptions and widen the tax base would find a place in the FY20 budget.

The off-balance sheet borrowing, also known as extra budgetary borrowing (EBR), has increased significantly since FY15. While this may be helping the government to adhere to or remain close to the glide path of fiscal consolidation, this is certainly an expensive way of mobilising resources. It also understates the fiscal deficit. Typically, the spread between the yield on 10-year government securities (G-sec) and 10-year ‘AAA’ rated public sector unit (PSU) bonds oscillate in the range of 70bp-90bp.


Ind-Ra opines that the fiscal consolidation must continue in line with the fiscal road map. In FY19, India’s general government’s (both central and state) fiscal deficit at 6.9% of GDP was much higher than the Fitch rated ‘BBB’ peer group’s median of 1.9%. Similarly, India’s general government debt at 69.0% of the GDP in FY19 was 1.84x of the ‘BBB’ rated peer group’s median. Many developed economies have a debt/GDP ratio much higher than that of India. However, due to a smaller revenue base, India’s debt/revenue ratio is much higher than that of other ‘BBB’ rated economies. This makes India highly vulnerable to growth cycles and it is an outlier even among ‘BBB’ category economies.



Further, the FY20 budget needs to come up with a five-year road map on tax reforms especially for corporate tax rates. This in combination with (i) capital infusion in the public sector banks, (ii) removing the roadblocks that have creeped into the Insolvency and Bankruptcy Code process, and (iii) encouraging/incentivising banks to buy good quality assets of non-bank finance companies (NBFCs), which in turn would provide the much needed liquidity to NBFCs, will go a long way in easing the current woes of the financial sector and reviving the private corporate/non-corporate capex. The current investment cycle is heavily dependent on government capex spending. Ind-Ra believes the government alone will not be able to do the heavy lifting because the share of government (central and state) in total capex of the economy was just 12.0% during FY12-FY18.

The other pressing issue that the FY20 budget must address is agrarian crisis. Needless to say, addressing agrarian crisis effectively would require a paradigm shift in the agricultural policy, which is currently guided by the overarching philosophy of food security alone. However, Ind-Ra believes, in the interim, FY20 budget will have to continue to focus on the income transfer schemes in combination with measures to strengthen the rural and agricultural supply chain infrastructure to minimise the pains of agrarian distress.

Since infrastructure is critical for accelerating and sustaining a higher GDP growth, past budgets have accorded significant priority to it. FY19 budget allocated INR5.97 trillion via budgetary and extra budgetary resources for the infrastructure sector. As the investment required in the infrastructure sector is huge, Ind-Ra opines select public sector NBFCs should be allowed to issue bonds of 20-year plus tenor which can qualify under the provision of the Reserve Bank of India’s statutory liquidity ratio. This will not only ensure lower cost of borrowing for these lending institutions but also reduce asset-liability mismatch risk due to the longer tenor borrowings.

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Analyst Names

  • Dr. Sunil Kumar Sinha

    Principal Economist and Director Public Finance
    India Ratings and Research Pvt Ltd 601-9 Prakashdeep Building 7 Tolstoy Marg New Delhi 110001
    +91 11 43567255

    Dr Devendra Pant

    Chief Economist and Head Public Finance
    +91 11 43567251

    Amit Jain

    Senior Research Associate

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