The government is performing a risky high-wire balancing act 

Let me put it simply: the government is performing two balancing acts simultaneously. In order to get to this perilous position, it has time and again turned precedent on its head, laying it open for the next administration to also throw caution to the winds. This is not good for a country of our size. You cannot steer a supertanker like a racing yacht, tacking and jibbing as the wind blows.  

What are the two balancing tricks? First, after assuring us that the economy is booming and GDP growth since May 2014 has been the fastest since independence, the government has pulled out all the stops to appease every section of the population: the ‘poor’ among the upper castes, small and marginal farmers, unorganized workers, small traders, and the middle class. ‘We feel your pain’ is the message as the elections loom. Will the voters take the bait?  

Second, the precedent- breaking interim budget has understated the fiscal deficit and overstated revenues.  

Take taxes. The budget sees goods and services tax (GST) collections rising 18% to ₹7.61 trillion in 2019-20, despite expecting to fall short in 2018-19 by ₹1 trillion. Remember, all revenue assumptions have been made with two months of the current fiscal year still to go. Remember also that GST rates have been continually trimmed, and the exemption limit doubled to ₹40 lakh annually for small traders.  

Income tax is seen rising 17.2% to ₹6.2 trillion in 2019-20 from ₹5.29 trillion this year — a lower rise than this year’s projected 22.8% growth from ₹4.3 trillion in 2017-18. And this, after 30 million taxpayers were removed by the latest rebate from the official claim of 68.5 million. Where is the tax buoyancy that will help the government spend more on desperately needed infrastructure, as well as 12% more on education and 13.5% more on health in 2019-20?  

What about revenues? The government’s disinvestment program is in shambles compouned by the Air India sale fiasco.  Against the 2018-19 target of ₹80,000 crore, disinvestment had fetched only ₹35,532 crore until the end of January, a 55% shortfall. Yet, the target for next year has been set at an unrealistic ₹90,000 crore.  

The Pit Just Got Deeper  

The fiscal deficit, now projected at 3.4% of GDP both this year and in 2019/20, is seen magically sliding to 3% by 2020-21. These figures already look like phantasmagoria. The 2019-20 deficit is seen at ₹7.03 trillion, although interim finance minister Piyush Goyal committed ₹1 trillion to three populist items: cash transfers to small farmers (₹75,000 crore), income tax rebates (₹20,000 crore), and pensions for unorganized workers (₹500 crore).  

The Centre for Monitoring Indian Economy (CMIE) notes that the April-November 2018 deficit had already hit ₹7.17 trillion, far higher than this year’s projected ₹6.34 trillion and higher even than next year’s predicted total.  

CMIE calculates this year’s deficit at ₹7.6 trillion, or 4% of GDP. This could be partially helped if the RBI decides at a February 18 board meeting to transfer a huge interim dividend of ₹30,000-40,000 crore to the Centre, bringing total transfers in 2018-19 to a whopping ₹70,000 – 80,000.

Remember also that the Bimal Jalan Committee looking into the RBI’s total reserves is mandated to submit its report by end-March. And don’t be surprised if, a couple of weeks ahead of the deadline, it green signals another giant transfer to government coffers before fiscal year end. (Past estimates have put the price at up to $1 trillion.) 

A JPMorgan report notes that to finance its deficit, the government has also been resorting to ‘off balance sheet’ borrowings, which are rising. For instance, the Food Corporation of India (FCI), which buys foodgrains at the mandated minimum support price and then selling them (at a loss) through the public distribution system (PDS), borrowing as much as 1% of GDP in 2018-19. This ought to have been included in the budget numbers. Budgeted food subsidies, which exclude FCI borrowings, are seen rising 7.5% to ₹1.84 trillion in 2019-20 

“More generally, if one were to add the Centre and the combined deficits of the states (which have expanded sharply in recent years), off-balance sheet borrowing (e.g., FCI), and borrowing by all central public sector enterprises, India’s total public sector borrowing requirement (PSBR) remains above a hefty 8.5% of GDP in both 2017-18  and 2018-19,” JPMorgan said. This PSBR estimates does not include borrowings by states’ public sector enterprises.  

Lacking Confidence  

Little wonder Moody’s described India’s fiscal slippage as credit-negative.  Little wonder that gross market borrowings, seen rising a hefty 26.8% to ₹7.6 trillion in 2019-20, have spooked debt markets. The yield on the benchmark 10-year government bond surged on Friday after the budget but settled back at 7.566% on Wednesday. Foreigners have dumped over ₹222 billion in sovereign debt over the past months, Bloomberg reported. Despite its vaunted growth, India is looking financially vulnerable to investors.  

The RBI’s credit policy, to be announced later today, will also weigh: It is expected to soften its stance, but hold off on a rate cut until April. if it rushes into U-turn, it will further hurt bonds and the rupee, which weakened 1% after the budget and has been Asia’s worst-performing major currency this year.

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