Shadow on fiscal health, but a harder test next year

The Minister of Finance, Nirmala Sitharaman, made use of an amendment to the Fiscal Responsibility and Budget Management Law, passed two years ago, to exceed her fiscal target of 3.3% of GDP for 2019-20 by half a percentage point. The next financial year is expected to see a reduction in the fiscal deficit to 3.5% of 3.8% for the current year.

A combination of a mid-year reduction in the corporate tax rate and mediocre GST collections on the heels of a slowdown in economic momentum resulted in government exceed your fiscal deficit target. It is likely that the next financial year will also be a challenge.

The budget has been built on a growth base of 10% of nominal GDP at Rs 224.89 lakh crore in 2020-21. However, gross tax collection is expected to grow 12%. But the most prominent feature on the receipt side is the objective of Rs 2.10 lakh crore, a jump of 223%.

It is likely that the key divestment exercise is that of Life insurance corporation . A Budget document expects that the profits from the sale of shares of the banks and financial institutions of the PSU will be Rs 90,000 million. This sale will more than compensate for the expected drop in surplus transferred by Reserve Bank of India .

Live plus Public sector companies are integral to overall Budget architecture as they now provide the bulk of government ’s capital expenditure. In 2020-21, about 62% of the planned capital expenditure of Rs 10.84 lakh crore is slated to come from public sector resources and borrowings.

The Budget for 2020-21 will raise resources of about 0.8% of GDP over and above the fiscal deficit through extra budgetary resources, where government will service the loan. The single largest loan under this route will be Rs 1.36 lakh crore raised by through National Fund. This is not a one-off and the extent of borrowing through this method is expected to increase to 0.9% of GDP over the next two years.

For all practical purposes, the de facto fiscal deficit is much higher than 4% if loans are taken into account through alternative channels, which gives an idea of ​​fiscal stress.