FM surprises with cutback in fisc target; nominal GDP expected to grow 12%

Nominal GDP expected to grow 12% YoY

Breaking tradition, Finance Minister Nirmala Sitharaman wasn’t looking to explicitly spell out the fiscal deficit target for 2019-20. It is not even there in the text of the speech. She finished the speech, thanked the Speaker, and was about to sit down. Then, she just said “For those who are curious, the fiscal deficit target is 3.3 per cent (of GDP), from 3.4 per cent earlier.”

Markets, analysts, and the financial media was largely expecting the 2019-20 Union Budget to either retain the 3.4 per cent fiscal deficit target set in the interim Budget presented on February 1, or even go for a fiscal expansion given a tax revenue crunch.

In the event, the Union Budget forecast a fiscal deficit, in absolute terms, of Rs 7.03 trillion, almost the same as in the interim Budget. However, the fiscal deficit target came down as a percentage of GDP as the Centre estimates nominal GDP this fiscal year to grow 12 per cent year-on-year to around Rs 211.01 trillion from Rs 210.07 trillion in the interim Budget.

The fiscal deficit for last year, 2018-19, was revised upwards by then interim Finance Minister Piyush Goyal to 3.4 per cent of GDP from a budgeted 3.3 per cent.

The headline fiscal deficit target for 2019-20 has been reduced by 10 basis points in spite of a reduction of Rs 55,464 crore in the budgeted net tax revenue from the interim Budget to the full Budget. Non-tax revenue, however, saw an increase of about Rs 40,532 crore over the interim budget, while disinvestment receipts saw an increase of Rs 15,000 crore.

The total Budget size remained almost the same, at Rs 27.86 trillion compared with Rs 27.84 trillion in the interim Budget.

“If you see the revenue side as compared to provisional actuals of 2018-19, direct taxes are up only 17.5 per cent in the full Budget, indirect taxes are up only 15 per cent. This brings realism to tax projections. These are realistic targets. There is also an increase in the non-tax revenue side, where we are expecting better dividends. On the expenditure side, it is more or less same,” explained Finance Secretary Subhash Chandra Garg at the post-budget media briefing.

“It is a realistic, doable budget. Some concerns have been expressed on borrowing outside the Budget. Even that has seen a reduction. Fully serviced bonds, which were about Rs 64,000 crore last year, are being brought down to about Rs 56,000-57,000 crore,” Garg said.

“The marginal change in the targeted level of the Government of India’s fiscal deficit for FY2020… will cap government bond yields in the near term. Nevertheless, the market will scrutinise incoming trends for revenues, disinvestment proceeds and expenditures to assess the likelihood that the fiscal target of 3.3 per cent of GDP for FY2020 will be achieved,” said Aditi Nayar, principal economist at ICRA Ltd.

“Pressure on domestic savings and interest rates have been reduced by opening up a channel for tapping external savings as also by reducing the fiscal deficit to 3.3 per cent of GDP from the interim Budget target of 3.4 per cent of GDP for 2019-20,” said DK Srivastava, chief policy advisor at EY India.