The revised 3.8 per cent fiscal deficit for FY20 looks ambitious as it is based on projected 18 per cent rise in tax collections against a paltry 5.1 per cent higher realisaition so far, and around Rs 65,000 crore mop-up through disinvestment in the last two months of the current fiscal, SBI Research said in a report on Sunday.
The revised deficit target is propped on the belief that the divestment will fetch Rs 65,000 crore through the next two months. As against the Rs 1.05 trillion budgeted target, the divestment proceeds has been one of the lowest in recent years at a paltry Rs 17,800 crore.
The Union Budget for 2020-21 used the permissible 50 bps deviation under Section 4(3) of the FRBM Act to widen the fiscal deficit at 3.8 per cent of the GDP, revealing a revenue shortfall of around Rs 2.60 trillion, of which states are losing Rs 1.09 trillion.
"After adjusting for the expenditure rationalisation of around Rs 88,000 crore, the revised fiscal deficit for FY20 comes to around Rs 63,086 crore over the budgeted numbers. The saving grace is the jump in non-tax revenue of around Rs 32,335 crore or 20 bps of fiscal deficit, possibly reflecting the AGR payments/interim dividend from RBI in lieu of telecom.
"Clearly, the Supreme Court judgement has helped the government contain fiscal deficit at 3.8 per cent instead of 4 per cent. If this amount goes up (potentially up to Rs 90,000 crore) the fiscal deficit number can even be lower than 3.8 per cent or alternatively it can be possible that any slippage in disinvestment receipts/tax receipts could be taken care of," SBI Research said in the report.
However, the problem is that the "revised estimates pegs income tax collections growing at 18 per cent as against 20 per cent budgeted earlier, which in our opinion, is a tad optimistic as the year-to-date FY20 collections as on December is only 5.1 per cent higher year-on-year," the report said.
The only saving grace has been for the second time in the fiscal after the April collections GST mop-up crossed Rs 1 trillion-mark at over Rs 1.2 crore.
FY21 nominal GDP growth is projected at a reasonable 10 per cent, says the report and pegs real GDP numbers for FY21 to be 5.5-6 per cent and fiscal deficit at Rs 29,491 crore, more than the FY20 revised number of 3.5 per cent of GDP.
On the new income tax regime leading to a consumption boost, the report said that the new tax regime will most likely makes no sense as given the optionality clause wherein income tax rates will be significantly reduced for the individual taxpayers who forgo certain deductions and exemptions. The new personal income tax rates will entail estimated revenue forgone of Rs 40,000 crore per year.
"Assuming a marginal propensity to consume of 0.70, the proposed revenue foregone of Rs 40,000 crore will translate into a consumption boost of Rs 1.33 trillion, but only if people migrate to the new tax regime.
"Our estimates suggest that given the increased tax liability under the alternative dispensation, such a possibility of migration looks remote. We are thus sceptical of a consumption boost," the report said.
Many analysts and tax experts have already flayed the move on income tax front, saying this will badly hit savings by way of investing in select assets classes likes mutual funds, housing and even stock markets as dividend distribution will also be taxed at the hands of the investor.
The budget has set an all-time high target of Rs 2.1 trillion of disinvestment for FY21 on back of the planned stake sale in LIC and the pending/remaining disinvestments of FY20. The disinvestment target of FY20 is now revised downwards from Rs 1.05 trillion to Rs 65,000 crore.
"We believe 10 per cent nominal GDP growth for FY21 can surprise on the upside, thanks to a lower base in FY20. Because, with FY19 growth now at 6.1 per cent, FY20 growth on an unchanged base can potentially be at 5.7 per cent, against 5 per cent earlier. This implies there could downside bias to 5 per cent GDP estimate in forthcoming CSO releases that can push up nominal GDP growth in FY21," it noted.
Gross tax revenue is expected to grow by 12 per cent in FY21 to Rs 24.2 trillion. This revenue target from taxation is supported by 10.4 per cent growth in custom duty, 14 per cent in income tax and 11.5 per cent rise in corporation tax.
Tax buoyancy for FY21 is estimated at 1.2 times. GST collection target is budgeted to increase at 12.8 per cent to Rs 6.9 trillion over FY20 revised estimates.
Major subsidies will remain flat at Rs 2.28 trillion.
For FY21, the government borrowing is budgeted at Rs 7.8 trillion and net borrowing requirement is pegged at Rs 5.40 trillion, considering repayments of Rs 2.39 trillion.
Total dividend from the Reserve Bank of India, banks and financial institutions is estimated at Rs 89,648 crore for FY21, almost 41 per cent lower than revised estimated of FY20 (Rs 1,51,636 crore), on the basis of a lower dividend transfer from the apex bank.
Considering declining tax revenue, non-tax revenue for meeting fiscal deficit is the key.
"Using the data from FY1972 to FY2017, our econometric estimates show that neither non-tax revenue growth causes GDP growth, nor GDP growth causes non-tax revenue growth.
"While the government taking recourse to non-tax revenue is fine this depends on growth picking up. In fact, higher non-tax revenues can cause sectoral imbalances. A case in point is the telecom sector which witnessed a rise in leverage in 2010 after the major spectrum auctions," the report said.