The government's dependence on the payment of RBI leaves budget financing at risk
NEW DELHI: The government is increasingly relying on single-income measures to close its budget gap, which raises questions about how it will finance spending promises beyond.
Finance Minister Nirmala Sitharaman it has an unexpected record profit of $ 24 billion from the Reserve Bank of India (RBI) and a budgeted income of Rs 1.05 lakh crore ($ 15 billion) from asset sales to finance the fiscal deficit of 3.3 per percent of gross domestic product (GDP) in the year until March 2020.
Sitharaman will need more revenue next year to reduce that gap to 3 percent, as mandated by law, without compromising spending. That can be difficult since slower economic growth has made it difficult for the government to improve tax collection and the momentum of the central bank and the asset sales program is unlikely to be repeated.
The RBI bonanza seems to be a unique measure and is not necessarily a good omen in the medium term from a fiscal point of view, said Madhavi Arora, economist at Edelweiss Securities Pvt in Mumbai. It would be crucial for the government to meet or exceed disinvestment objectives in the midst of falling tax revenues.
Government revenue was $ 24 billion below its goal last year.
While the finance minister has so far resisted calls for a significant fiscal stimulus to revive the economy, bond traders fear that the weak economic impression of last Friday may force the government to yield. Lakh Crore helped sovereign reference bonds limit their worst performance in 16 months in August.
Sitharaman has said that he has not yet decided how RBI funds will be used. Cash is more than enough to pay income support to farmers and recapitalize troubled state banks this year.
Countries traditionally finance their large spending programs with taxes. India's tax collection in the four months to July was only one fifth of the budget objective of Rs 16.5 lakh crore. Last year's deficit forced the government to cut expenses to meet the fiscal gap objective.
The country's tax-to-GDP ratio of approximately 11 percent is below the world average and has declined despite an amnesty program in 2016, which was followed by a surprising reduction in cash to catch evaders from taxes.
The government is registering a 12% increase in collections this year, based on a 7% economic expansion. That may be too optimistic, given that GDP growth in the June quarter slowed to 5 percent.
In the pre-election period earlier this year, Prime Minister Narendra Modi announced a series of ambitious programs to win over voters. Since he returned to power with a greater margin, he now has to find resources to finance the recurring expenses of agricultural income, employment guarantees and access to health.
The success of the asset sales program is also uncertain, given the decreasing appetite of investors and volatile financial markets.
The government will have to reduce its dependence on RBI transfers to close fiscal gaps and review asset sales and improve tax compliance, analysts led by Suvodeep Rakshit at Kotak Institutional Equities said.