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Pre -Budget III: Why will 2020-21 be more challenging year?

Weak RBI support could entirely offset better tax growth

* In this third and final report of our pre-budget series, we discuss the factors that make the Union Budget 2020-21 very challenging. In FY20, while net taxes are likely to grow only ~3% (v/s budgeted growth of 25.3%) and divestment proceeds will also be likely only 50-60% of the target (down 30% from FY19), total receipts are still expected to grow 6% YoY, primarily helped by unexpectedly large dividends from the RBI amounting to INR1.48t. Besides, the cumulative rate cuts of 135bp in CY19 will help the government save ~INR600b on its interest payments. Together, thus, the RBI provided a massive support of INR2.1t (or 1.03% of GDP) in FY20, which went almost unappreciated.

* Things, however, will be different in FY21. Even if we assume disinvestment proceeds of INR1t and higher growth of ~10% in (net) tax receipts, the absence of the RBI’s support can turn out to be an offsetting factor. With (a) the banks parking excess funds (averaging INR1.9t till 24th Jan’20) at the RBI’s liquidity adjustment facility (LAF) window v/s average LAF deficit of INR459b last year and (b) no room for further rate cuts, the government is unlikely to receive as large a support in FY21. Also, if the RBI provides an interim dividend this year, the surplus next year will be even lower.

* Overall, notwithstanding expectations of better GDP growth next year, total receipts could grow slowly at only ~4% YoY in FY21 vis-à-vis expected growth of 6% this year. Assuming an unchanged fiscal deficit of 3.5% of GDP, spending growth would also be lower at 6.6% next year, as against ~7% this year. The budgeted estimates (BEs) to be presented in the budget on 1st Feb’20, however, could be very different from these estimates.

In Part I of our pre-budget note series, we had highlighted the need for a fiscal policy to match the monetary policy and discussed about the limited fiscal space available in Part II. In this third and final note, we argue that, notwithstanding higher expectations, the Union Budget 2020-21 could be even more challenging.

RBI’s exceptional support in otherwise dismal year

Total receipts of the government increased at a respectable ~13% YoY in the 8MFY20 (Apr-Nov’19) – much better than 3.4% growth in the year-ago period but short of 25% growth budgeted in the Union Budget 2019-20 presented in Jul’19. Details of total receipts, however, reveal a very interesting insight. While (net) tax receipts increased at a dismal 2.6% over Apr-Nov’19 (vis-à-vis 4.6% growth in the same period last year), large part of reasonable growth in total receipts is attributed to non-tax revenue receipts, which increased ~68% YoY, following 31% YoY growth in the corresponding period last year (Exhibit 1 on the next page). It implies that taxes (which account for ~80% of total receipts) accounted for only ~16% of total receipts growth (2.1 percentage point (pp) out of ~13% growth), while non-tax revenue receipts (NTRR) accounted for more than four fifths of total receipts growth (10.5pp out of ~13% growth) in 8MFY20 (Exhibit 2). Disinvestments, albeit 10% higher than in the year-ago period, accounted for only ~2% of total receipts growth in 8MFY20.

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