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Better transparency leads to higher fiscal deficit

No tax hikes and higher capital spending to support growth Budget 2021-22 was presented on 1 Feb’21 amid a challenging macro environment. With the first decline in nominal/real GDP in four decades, the Government of India (GoI) had to walk the tightrope, which they seem to have done. Though there is no large fiscal stimulus, the absence of any tax hikes and better fiscal math by this renewed and bold GoI provides extreme comfort.

* A large part of the higher fiscal deficit is due to better accounting: The GoI has pegged fiscal deficit at 9.5% of GDP in FY21RE (Revised Estimate), much higher than consensus estimates of 7% of GDP. While the headline number looks scary, almost four-fifth (or 2pp of GDP) of this surprise was due to food/fertilizer subsidy, which the GoI has decided to take up on its books rather than keeping it off-Budget (through the Food Corporation of India, FCI). This transparency in fiscal math is highly appreciated and commendable (as we had demanded in CY19).

* Higher market borrowings disliked by the debt market: The GoI announced additional borrowings of INR800b in Feb-Mar’21. In fact, the budgeted fiscal deficit of 6.8% of GDP for FY22 is also higher than consensus (of 5.5% of GDP), due to which net market borrowings are pegged at INR9.2t, higher than our expectations of INR8-8.2t.

* After many years, tax receipt estimates look realistic: Apart from better accounting, it was refreshing to see that the GoI has budgeted achievable growth (16.6% YoY) in FY22, implying a tax buoyancy of 1.2x. While it is not ambitious, it is also not conservative. The government has budgeted ~22% growth in direct taxes, customs, and Goods & Services Tax (GST), along with a 7% YoY decline of in excise duties. Nontax revenue receipts (expected to grow by 15.4% YoY) and the disinvestment target of INR1.75t are on the optimistic side. After many years, the receipt estimates are not as ambitious and more on the realistic side. The absence of any tax hikes were extremely comforting.

* Focus on capital spending is also commendable: With achievable receipt estimates, GoI has budgeted for 1% growth in total spending in FY22. It is important to note that this is on the back of 28.4% growth in FY21RE, which was due to very high subsidies. Excluding subsidies, spending is expected to grow 16% YoY in FY21RE, like in FY20. The same is budgeted to increase 11% YoY in FY22. The GoI has budgeted to grow capital spending substantially next year, so that it accounts for 16% of total spending, much higher than the 12.5% in the past few years.

* While the government has refrained from any kind of direct fiscal stimulus, there was nothing surprising in today’s Budget data. While the higher fiscal deficit number looks astonishing, it is due to better accounting procedure, which is a much-needed welcome move. No change on the tax front is also highly appreciated. The much awaited rural spending allocation, which slows a considerable contraction in FY22, is largely on account of a very high base in FY21. We do not think there is much to worry about on this front too. However, the higher-than-expected market borrowing number may send jitters through the bond market.

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