India Special February 2020

India: FY 2020 budget unlikely to kickstart economic growth

On 1 February, the government unveiled its budget for the 2020 fiscal year, which begins in April. The budget highlights the Modi administration’s attempts to balance supporting economic growth at a time of slowdown with maintaining fiscal prudence—especially as the government announced it was likely to notably miss its original fiscal deficit target for FY 2019. Overall, the FY 2020 budget will likely have a minimal effect on growth, while market analysts will be closely monitoring the realization of revenue projections.

The standout features of the FY 2020 budget are on the revenue side, as the government plans substantial state-asset sales. In addition, the government will abolish the dividend distribution tax and lower income taxes. Despite lower taxes, the government projects tax takings to increase 12.0%.

However, there is skepticism as to how this increase will be achieved. Analysts at Goldman Sachs, for example, noted: “Unless there is a sharp increase in tax compliance, we think it is quite likely that the government will have to cut current spending, as was the case [in FY 2019]” to keep the fiscal deficit in check. Moreover, given that the government has underachieved on its asset sales in recent years, they added markets will want to see concrete timelines in the coming weeks “to have more confidence in the government’s privatization plans”.

On the expenditure side, spending is set to increase by 12.7% in FY 2020 (FY 2019: +16.6% year-on-year), although this is primarily due to greater interest payments, which limits the benefit to the real economy. Infrastructure spending and income support for farmers will also increase.

The government announced its fiscal deficit likely increased to 3.8% of GDP in FY 2019, higher than both the originally-budgeted deficit of 3.3% of GDP and the recorded shortfall in FY 2018 of 3.4% of GDP. The fiscal deterioration was due to lower-than-expected tax revenue and even though the government spent less on food subsidies than it originally planned, in response to underwhelming takings. For FY 2020, the government projects a narrower fiscal deficit of 3.5% of GDP, which is slightly more optimistic than our Consensus Forecast of a shortfall of 3.6% of GDP.

Gene Fang, associate managing director at Moody’s, suggested the government’s FY 2020 fiscal deficit target was ambitious, saying: “While the latest budget targets a narrower deficit, prolonged weakness in nominal GDP growth in India, combined with lower revenue collections, has dampened the outlook for fiscal consolidation, raising the risk that the debt burden may not stabilize.”

Meanwhile, assessing the budget’s overall effect on economic growth, analysts at Nomura noted: “In the run-up to the budget, speculation was rampant over whether the sharp slowdown in growth would trigger consumption-oriented fiscal activism. Policymakers instead chose to adopt a ‘middle path’, which we believe will be growth-neutral in the short run, while the return of fiscal consolidation as a broader policy objective should be a medium-term positive.”

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