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New budget reduces fiscal deficit target, but analysts are unconvinced by revenue forecasts

On 5 July, Prime Minister Modi’s new government unveiled its final budget for the fiscal year 2019, which runs from April this year to March next year. The budget, which contains little additional spending compared to that of the previously announced interim budget, is widely hailed as fiscally prudent in that sense. However, analysts are skeptical about the government’s revenue forecasts, leading them to wonder whether the fiscal deficit target of 3.3% of GDP is truly attainable.

Total expenditures in the final budget remain unchanged from the interim budget, with an increase of 13.3% compared to the previous fiscal year. As in the interim budget, the largest beneficiary of this fiscal year’s extra spending is the agriculture sector, which will see 75.0% more government expenditure. This is partially because of the recently announced cash handouts of INR 6,000 (USD 84) to farmers with small land holdings.

On the revenue side, the government forecasts higher revenue of 13.3% this fiscal year, again as it did in the interim budget. Although tax and non-tax revenues are expected to drive this rise, total revenue will be partly dependent on a 10.9% increase in borrowings and other liabilities. Moreover, although the government’s economic growth forecast of 7.0% closely coincides with our Consensus Forecast, the government’s expected haul of tax revenue “would require a bumper year” for collections, according to analysts at Nomura.

All in all, the government targets a fiscal deficit of 3.3% of GDP in fiscal year 2019, which is down from both the 3.4% deficit in FY 2018 and the interim budget for FY 2019. Analysts at Goldman Sachs said, “as a result of ambitious revenue growth assumptions, if tax revenues once again fall short of target in [FY 2019], it is quite likely that the government will have to cut current spending, as was the case in [FY 2018]” to meet this target. Analysts at Nomura seemed to agree, concluding “the government may eventually meet its fiscal deficit target, but it will remain a struggle and will require pruning expenses.”

In addition to the tax and spend announcements, the government also unveiled a raft of new policies covering a wide range of areas. In business, the government will further open up the insurance and retail sectors to foreign direct investment, and is in consultations to open up FDI in the aviation and media sectors. Moreover, more companies will now be eligible for a lower 25.0% tax rate, while the government also said it will raise the minimum proportion of public shareholding in listed companies to 35.0% from 25.0%, which prompted a selloff in the stock markets. In banking, the government pledged INR 700 billion (USD 10.2 billion) of capital to go into public-sector lenders, which account for over half of banking assets in India. Moreover, the Central Bank will be given more regulatory power over non-bank financial companies, as many of them have come under strain in recent years.

In sum, the FY 2019 budget reflected a shift from “[the pre-election] populism in the interim budget to a prudent final budget”, as summarized by analysts at Nomura. Indeed, strong buying pressure drove down the 10-year government bond yield on the day of the budget’s announcement. It seems the government has shifted its focus to getting its books in order and improving the investment environment; however, analysts will remain wary of those revenue forecasts, given the doubts about tax collection.

Our complete panel of Consensus Forecast analysts forecast the fiscal deficit to fall to 3.4% of GDP in FY 2019 and 3.1% in FY 2020.