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Fiscal deficit looks stretched; spending to be curtailed in March
* Fiscal deficit for Apr-Feb’20 looks stretched. With March last week marking the beginning of the Covid-19 lockdown, we expect a sharp cut down in expenditure and transfer to off-balance sheet to meet the revised deficit target.
* Fiscal deficit for Apr-Feb’20 exceeds the revised target by 35%: Unrealistic revenue targets, even after the downward revision of Rs1.5tn in revised estimates, contributed to the widening in fiscal deficit. It is likely that a similar scenario will occur even in FY21. In our view, this will result in a sharp curtailment in expenditure in Mar’20. The lockdown phase and the postponement of amnesty scheme deadline in direct and indirect taxes are likely to further drive a decline in revenue collections.
* Borrowing indicative calendar for H1FY21 at 62.5% of budgeted borrowing: We believe that a lower borrowing calendar with the possibility of higher deficit is likely to push higher borrowing in the latter half of the year. NSSF rates have also been sharply cut, so the comparative sheen of the instrument is lower. In addition, with the likelihood of a decline in income growth this year, we believe savings would be lower. Hence, it would be difficult for the government to obtain revenue from this stream as well.
* State finances strained: Apr-Jan’20 data show that overall state tax collection growth is at a meager 1.9%, a record low. With states’ reduced flexibility to increase tax revenues, the dependence on the centre has risen. So the spending of state governments would be more toward populist measures such as income support schemes rather than capital spending.
With lower revenue mobilization, we see a further revision of receipts by Rs1.9tn: Lower net revenue receipts and elevated expenditure pushed fiscal deficit to 135% of FY20RE, and as a proportion to RE it is at a record-high level. Gross tax buoyancy is negative with: 1) direct tax collection declining by 3.5% yoy - partly reflecting the corporate tax cut impact; 2) indirect tax collection growing by 1.7% yoy, reflecting continued economic slowdown. We believe that gross tax collection will decline 2.7% yoy, as March this year is likely to have a big hole in revenue collections. In addition, the central govt had upped the income tax collection growth on Vivad Se Vishwas scheme – but the last date of this scheme has been delayed to Juneend. Similar fate is seen even in the GST amnesty scheme which has been rolled forward to June. In tax collection itself, we expect a Rs1.6tn shortfall. Non-tax revenue collection has been strong so far after the huge transfer from the RBI, but it not likely to fill the latency in gross tax collection. AGR receipts also helped in filling the gap. Disinvestments so far has been ~Rs352bn vs. revised target of Rs650bn – factoring in this gap and current volatility, it looks difficult to achieve the ambitious target of Rs2.1tn in disinvestments for FY21.
Central govt spending grows 12.6% yoy; we expect sharp curtailment in expenditure in March: Central govt spending for Apr-Feb’20 grew 12.6% yoy; thus, the asking rate for Mar’20 to match the revised estimates is a 24.5% yoy decline. The lockdown and lack of additional borrowing are suggesting that March spending would be weaker than the earlier years. This would further affect growth. Expenditure growth was still very concentrated. Revenue expenditure grew 12.9% yoy, which stemmed mainly from higher transfers to state (to meet expenditure toward centrally sponsored schemes and GST compensation), agri spending (cash subsidy paid to farmers; so far the amount disbursed is only 91% of the revised - as it also includes disbursals from 1st installment which was to be paid in Q4FY19) and defence expenditure. Capital spending growth of 11.1% yoy is largely from growth in roads outlay (however, tender activity does not point to any such improvement), defence and in railways.
State spending grows 8.4% yoy: Overall, the transfer to the states is at a slower pace compared with FY19. In addition, the states’ own tax buoyancy has fallen considerably, which has dragged the overall tax collection to 1.9% yoy growth. States’ revenue spending grew 9.8% yoy. We believe that income support schemes of some states helped in overall spending growth. States’ capital spending has declined 1.1% yoy, a record low.
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