Public Debt in India

India - Public Debt

Pre-election budget threatens fiscal sustainability

On 1 February the interim budget for fiscal year 2019, which will start in April and run through to March 2020, was unveiled by the government. The budget, which passed through both houses of parliament by 13 February, allows for a generous 13.3% increase in total expenditures and targets a fiscal deficit of 3.4% of GDP, which would equal the shortfall achieved in FY 2018, according to advance estimates. However, the government expects the deficit in FY 2019 to miss its previous estimate of 3.1% of GDP, threatening to derail fiscal consolidation efforts. The budget should boost economic growth and is considered interim in its nature because the government that emerges victorious from general elections in April and May could make modifications upon assuming power.

The agricultural sector will benefit most from the FY 2019 budget, with expenditure surging 73.2%, which is by far the largest increase in sectoral spending and should directly benefit approximately 600 million Indians in the run-up to hotly-contested general elections. A large chunk of this increase stems from a new scheme of cash handouts for farmers with small land holdings that is worth INR 6,000 (USD 84), to be gifted over three separate instalments. Notable increases are also set for public pension, defense, education, healthcare, interest payment and tax administration spending.

New tax relief measures for a large swathe of the middle class, including an increase in the minimum income tax threshold to INR 500,000 (USD 7,000) and new capital gains tax exemptions, are also laid out in the new budget. Despite this, the government forecasts total revenues to rise by 13.3% in FY 2019, based on nominal economic growth of 11.5% in FY 2019. All told, the government forecasts the fiscal deficit to remain unchanged in FY 2019 from the 3.4% in FY 2018. However, given that the government missed its previous 3.3% deficit target for FY 2018, and has now settled for a deficit in FY 2019 that is larger than the 3.1% it previously expected, the public purse of India suddenly looks more fragile. Indeed, on 25 January—just prior to the public unveiling of the budget—Moody’s honed in on “ongoing fiscal slippage from spending and tax cut proposals ahead of elections” and argued that it was negative for the country’s credit rating.

In terms of what this all means for the Indian economy going forward, analysts from Nomura said:

“The government has presented an expansionary budget […] The cumulative effect of the cash transfer to farmers and the middle-income class will boost consumption, but likely at the cost of crowding out private investments. The government has not clarified whether the farm package is a one-off or recurring. This holds the key to assessing whether the impulse will result in a reflationary impulse. We see an upside risk to our [FY 2019] GDP growth projection owing to the positive fiscal impulse, but will assess the whole picture, keeping weak global growth and the crowding out of private investments in mind.”

India Fiscal Balance Forecast

Our complete panel of Consensus Forecast analysts forecast the fiscal deficit to fall to 3.2% of GDP in FY 2019, which is unchanged from the previous month’s forecast, and again to 3.1% in FY 2020. In terms of GDP, our panelists see growth of 7.3% in FY 2019, which is up 0.1 percentage points from the previous month’s forecast, and 7.3% again in FY 2020.