Rarely has there been so much anticipation and curiosity about the budget as this year. 2019 has been a difficult year for the Indian economy, which slowed sharply, with several market participants worried about India being on an inescapable path to a hard landing.
Policymakers had to perform a difficult balancing act between providing a stimulus to boost growth, but at the same time with little fiscal space. India’s consolidated deficit continues to be an outlier across emerging economies, with Moody’s recently sounding an alarm bell on the country’s fiscal and debt position.
Policymakers seemed to have taken a calculated risk by maintaining a path of fiscal consolidation, while at the same time having an ambitious expenditure programme — an expenditure growth of 12.7% and capital expenditures at 18.1%, compared to a nominal GDP growth of 10%, which is reasonable. However, whether this balancing act succeeds or not will depend on one key factor: execution of the privatisation plan.
The budgeted increase in asset sales is undoubtedly a win-win for GoI, and can help balance the twin objectives of macroeconomic stability and growth. Unlike an increase in taxes that can be contractionary, asset sales do not lead to a negative fiscal impulse for the real economy.
In fact, International Monetary Fund (IMF) Government Finance Statistics best practices suggest to treat privatisation receipts as a ‘below the line’ financing item, which does not contribute toward the deficit.
This could help GoI to stay on a path of fiscal consolidation, as well as boost spending growth, during times of weak economic activity. However, whether this fine balance succeeds would depend crucially on execution of the disinvestment plans. The execution of privatisation plans was weak in FY2020, and has historically been the case, with GoI resorting to sales within public sector entities to achieve budget targets.
Asset sales underperformed significantly in FY2020 (0.3% of GDP, compared to a target of 0.5%), yet are pegged at even more ambitious levels for next year (0.9% of GDP). What markets would look forward to in the coming weeks is a credible programme, greater details and concrete steps with timelines to have more confidence in GoI’s privatisation plans.
The intent on privatisation is clear, and proposal to sell part of its holding in LIC by way of initial public offering (IPO) is a welcome move. What markets are looking for is greater progress on implementation.
Another key risk to the budget is on revenue collections. Overall, with budgeted nominal GDP growth of 10% year-on-year and gross tax revenue growth of 12% year-on-year, the implied tax buoyancy stands at 1.2, which continues to appear ambitious versus the 0.5 tax buoyancy achieved in FY2020. Unless there is a sharp increase in tax compliance, it is quite likely that GoI would once again have to cut current spending — for instance, through deferring of subsidy payments, as was the case in FY2020.
Although spending has been reduced in FY2020 vis-à-vis budget to minimise the fiscal slippage, off-budget spending continues to be on the rise. The total off-budget borrowing by the Central Public Sector Enterprises (CPSEs) was reported at 2.4% of GDP in FY2020 revised estimate (RE) — up from 1.5% of GDP in FY2020 budgeted estimate (BE), and from 2.2% of GDP in FY2019.
If we include states CPSEs, a consolidated deficit should be at 8.8% of GDP in FY2020 — this is a lower bound, at best, as it does not include spending by state PSEs — up from 8% of GDP in FY2019, and a significant positive fiscal impulse of 0.8 percentage points of GDP. In line with a better global economy, easing domestic financial conditions, improving sentiment and easing of infrastructure bottlenecks, and incoming data starting to show some green shoots, 2020 and 2021are expected to be better than the last few years for the economy.
(The writer is chief India economist, Goldman Sachs)