FM Nirmala Sitharaman presented INR 30.4 trillion expenditure plan for FY2021 (starts April 1, 2020). It is 12.7% increase over the revised expenditure estimate for FY2020. Revenue growth is expected to be 9.2% (16.3% if we consider revenue plus recovery of loans & divestment receipts).
FY2021 budget focuses on three prominent themes: (i) aspirational India (better standard of living and access to health, education and jobs), (ii) economic development (reforms and private sector development to enhance productivity and efficiency), and (iii) caring society (humane and compassionate development).
Expenditure: Revised total expenditure for FY2020 is estimated to be 96.8% of budgetary estimate in FY2020. For FY2021, out of INR 30.4 trillion, about 86.5% of total expenditure outlay consists of revenue expenditure (recurrent expenditure) and the rest 13.5% is capital budget. About 31% of the revenue budget consists of interest payments and another 9% grant for capital assets for states and union territories.
The budgeted expenditure for FY2021 is equivalent to about 13.5% of GDP. Revenue expenditure is estimated to be 11.7% of GDP and capital expenditure 1.8% of GDP— not much difference compared to FY2020, but if nominal GDP growth is below 10%, then it will increase. Subsidies amount to about 1.2% of GDP, of which 44% is food subsidy and 27% fertilizer subsidy.
North Eastern areas have been earmarked INR 601 billion, up from INR 533 billion in FY2020.
The government is expecting addition INR 6.7 trillion from resources of public enterprises. So, the expenditure envelope is about INR 37.1 trillion.
Revenue: As per the revised estimates for FY2020, the government expects to mobilize 96.8% of estimated revenue. The biggest hit is coming form tax revenue (net to center), which is expected to be just 91% of budgetary estimate.
In FY2021, the government is expecting to mobilize INR 20.2 trillion revenue, of which 80.9% is tax revenue and the rest 19.1% is non-tax revenue. As a share of revenue mobilization, compared to FY2020 revised estimate, the government is marginally lowering tax revenue mobilization but increasing non-tax revenue mobilization targets. The government wants to mobilize INR 2.2 trillion in the form of non-debt creating capital receipts. A substantial part of it consists of divestment receipts (INR 2.1 trillion), which look a bit ambitious considering over 200% growth over FY2020 revised estimate. In fact, the government could not meet the divestment target in FY2020 (INR 0.65 trillion vs INR 1.05 trillion targeted).
The projected revenue is estimated to be 10% of GDP (7.3% tax revenue, 1.7% non-tax revenue and 1% non-debt creating capital receipts), which is marginally lower than 9.4% revised revenue estimate in FY2020. Note that non-debt creating receipt is estimated to be about 1% of GDP, much higher than 0.4% of GDP last year. This is primarily due to a large divestment target (about 0.9% of GDP, up from 0.3% of GDP in FY2020).
Of the total revenue to be mobilized by the center (including transfer to NCCF/NDRF and state’s share), GST and corporation taxes each account for about 22%.
Fiscal deficit: The projected expenditure and revenue including recovery of loans and divestment receipts leaves a budget gap of about INR79.6 trillion for FY2021 (3.5% of GDP). The government wants to finance this fiscal deficit by borrowing and other resources (including drawdown of cash balance). Specifically, it is planning to borrow almost all of it from the internal market. Specifically, about 68% of it will be in the form of market borrowing (dated government securities) and the rest from securities against small savings, state provident funds and other receipts including 364-day treasury bills and net impact of switching off of securities. External borrowing is estimated to be about INR46.2 billion (0.021% of GDP).
For FY2021, the projected revenue deficit is 2.7% of GDP, fiscal deficit 3.5% of GDP, and primary deficit 0.4% of GDP. In FY2020, the estimated revenue deficit is 2.4% of GDP, fiscal deficit 3.8% of GDP and primary deficit 0.7% of GDP.
The reduction in deficit targets primary hinges on the ability of the government to accomplish its divestment target. Divestment of government-held assets is kind of one-off revenue bonanza. Relying on divestment alone to lower fiscal deficit is not going to be sustainable. However, if GDP growth accelerates (more infrastructure investment funding by divesting government-owned assets), then revenue mobilization will also pick up and fiscal deficit could be contained. Fiscal Responsibility and Budget Management (FRBM) Act sets fiscal deficit target at 3% of GDP by FY2021 and central government debt at 40% of GDP by FY2025.
So, how is this going to affect GDP growth, which is estimated to drop to 5% in FY2020. Economy Survey 2019/20 projected economic growth to rebound to 6%-6.5% for FY2021. Both public, corporate and financial sectors are stretched right now. India needs stable, long-term foreign capital in infrastructure projects (highways, solar energy, etc). The overstretched fiscal position (fiscal deficit of 3.8% of GDP in FY2020) might have restrained the government from bringing a fiscal stimulus. The government is hoping that reforms and efficiency gains will help boost economic activities and achieve the growth target.
An average monsoon rain and an effective farm and fertilizer subsidy scheme that will boost rural output, timely implementation of reforms already enacted and rolling out of new ones to ease doing business and to boost investor’s confidence might likely be the main drivers of growth in FY2021. Specifically, accelerated implementation of National Infrastructure Pipeline projects has the potential to boost industrial output. Furthermore, the slashing of personal income tax rates might increase private consumption of the section of the population that typically has high marginal propensity to consume. Government capital expenditure might also pick up. Against this backdrop, GDP (at market prices) could grow at around 6% (GVA growth of about 5.8%).
Things to look out for in the next few months:
- Efficiency of budget execution and implementation of reforms including the ease of doing business for MSMEs. National Infrastructure Pipeline— which includes projects related to housing, safe drinking water, access to clean and affordable energy, healthcare for all, world-class educational institutes, modern railway stations, airports, bus terminals, metro and railway transportation, logistics and warehousing, irrigation projects worth INR 103 trillion over five years— would be crucial here. The government is setting up project preparation facility to speed up implementation.
- Monetary policy that is both accommodative (inflationary pressure as economic activities pick up) and growth-enhancing (need to watch out for growth of credit to private sector)
- Possible fiscal stress if revenue mobilization falls short of expectation (emanating from lower economic activities, especially nominal GDP growth, and missed divestment target. The fiscal liability emanating from off-budget spending needs to be scrutinized.
- Pick up in private consumption due to cut in tax rates and efforts to boost rural economy
- Steps taken to tackle the stress faced by the NBFC or shadow banks
- The impact of higher fiscal deficit on India’s sovereign rating