Indian financial market will look for improved transparency in the Union Budget announcements next month, according to a report by Singapore-based banking group DBS.
Any reduction in the fiscal deficit could result in a negative credit impulse in the near-term, but will need to be balanced with a credible consolidation plan further-out, according to the the bank’s research report India Budget Preview: Loosening the purse released on Thursday.
The report noted that fiscal deficit in the first eight months of FY20, stood at 15% above target, driven by weak revenues.
At an aggregate level, expenditure has been in line with the budget trend. The fiscal year-to-date (FYTD) deficit overshoot is not out of sync with past trends, it added.
This is because, typically, the fiscal run-rate worsens for three-fourths of the year and then moderates in the final quarter as expenditure is scaled back and seasonal revenue flows kick-in, wrote DBS economist Radhika Rao.
Run rate of the FY20 math, however, suggests that the 4QFY20 turnaround might be insufficient to contain a deficit slippage, Rao said.
Gross tax revenues rose by a modest 0.8%t year-on-year (YoY) in FYTD (by November), slowing from 1.2% and 1.5% in the previous two-months.
Expectations are high for non-tax revenues to provide cushion. So far, this has comprised excess RBI’s dividends (0.25% of GDP), partial payments by telecom companies following a court ruling, and divestment proceeds, wrote Rao.
Key strategic stake sale in five PSUs announced in November were an important move, but with less than a quarter left in this fiscal year, proceeds could accrue to FY21.
For FY20, by November, collections stand at ₹180 billion, compared to a target of ₹1.05 trillion (0.5% of GDP). Factoring in a late push by sale of minority stakes and ETF collections, the count could improve to ₹600 billion, yet below target.
To accommodate this revenue shortfall, we expect expenditure to be scaled back in 4QFY20, said Rao.
The Department of Economic Affairs have reportedly asked departments to compress their spending to 25% of their budgeted sum in 4QFY20 versus 33% in the past few years.
This might lead ministries who have underspent in early part of the year to witness sharper cuts in 2H.
More savings are also likely via slower disbursements under the PM Kisan scheme, deferment in subsidy payments and delay in rolling out of sectoral measures announced in 2H19, reining in expenditure.
Netting of weak revenues and expenditure cuts against the background of an undershoot in nominal GDP, a slippage of 0.3% in the deficit target is likely in FY20, according to Rao.
