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India Strategy: Rural consumption push and Fiscal ambitiousness - two sides of the coin named - Interim Union budget FY20

Strong rural consumption push and risk of ambitious fiscal math are the two key takeaways from FY20 interim union budget:

1) The Rs750bn push through PM KISAN scheme is a sizeable impetus for the rural economy. Combined with MNREGA, this stands to be the highest fiscal stimulus for the rural economy in recent history (4.7% of nominal Agri GVA). When MNREGA impetus touched similar proportions in FY09-FY10, we saw strong volume growth on most rurally-oriented companies in the 2 years that followed (Exhibit 1-6). Moreover, our analysis of consumption patterns from NSSO (National Sample Survey Office) reports and other relevant economic data points indicate that as rural populace gets richer – there is increased propensity to consume premium staples, tractors, 2 wheelers along with an increased spend on education & medicine (Exhibit 10-15). 

2) With the release of Dec 2018 fiscal numbers, Q4FY19E implied estimates for GST and income tax collections look even more ambitious with a miss likely (we observed a similar miss of ~Rs455bn in tax collection in Q4FY18). FY20 tax collection estimates look ambitious too - which we believe would mean lower capex momentum, higher arrear payments and possibly higher off-balance sheet financing in Q4FY19 and FY20. This could lead to a possible crowding out in bond markets leading to an upward bias on bond yields, thus making it tougher for private players to borrow from markets.

Rural fiscal impetus (MNREGA and PM KISAN Scheme at 4.7% of nominal Agri GVA, highest in recent years

• MNREGA and PM KISAN scheme together account for 4.7% of nominal Agri-GVA worth of stimulus in FY20. We had gotten close to this level of fiscal stimulus in FY09 and FY10 (~4% of nominal Agri GVA), post which, we saw strong volume growth across rural-oriented companies/sectors – tractors, motorcycles, mopeds, HUL, etc., in FY-11 and FY12 with a 1-2 year lag.

o  In Exhibits 1, 3, 5 and 6, we have overlapped FY11-FY12 volume growth on FY09-FY10 stimulus to understand the impact of the stimulus.

• Our detailed analysis further indicates that crop production volume and fiscal stimulus have been key factors that support rural consumption-related volumes. Especially when one falls weak, the other supports (classic example being FY17-FY18, which saw robust crop output supporting rural consumption volumes in FY18-FY19).

o  As Rabi sowing is weak for FY19 (down 4% yoy as of 1 Feb 2019, a key risk we have been consistently highlighting), we expect PM-KISAN scheme to provide stimulus, thereby supporting rural consumption.

As fiscal stimulus enters the system, pick up in tractor volumes is generally quicker than conveyance upgrades (purchase of motorcycles and mopeds) and staples premiumisation, as tractors are income facilitators, while consumption related upgrades are outcome of better incomes. NSSO survey also indicates that with incremental money, rural households tend to spend higher amounts on medicine and tuition/education.

• As per NSSO’s report, as rural populace gets richer, there is an increased propensity to spend on 2 wheelers, education & medicine, with the incremental money

o  NSSO’s 68^th survey on consumption patterns of Indian households survey hints at an average per capita per month rural consumption expenditure of Rs2,200 (on inflation-adjusted basis). If one person in a family of 5 receives PM KISAN benefit, it would mean an approximate support of 5% on per capita expenditure. Actual support may be higher, as more than one person in a family may claim this benefit (for people holding land <2 hectares).

o  Also, government expects this scheme to reach out to 2/3rd of rural population (120mn households out of 180mn, indicating a deeper reach).

o  Further analysis of rural consumption patterns from NSSO report indicates that as rural households get incrementally richer they tend to spend more on medicine, tuition, 2 wheelers, mobile phones, refrigerators etc over other categories covered in the survey.

Fiscal ambitiousness in revenue estimates for Q4FY19E as well as FY20BE- Would translate as a risk to capex spend and off balance sheet financing

We believe revenue estimates (particularly GST and income tax collections) for FY20 look ambitious as both income tax and GST share collections to GDP ratio are expected to expand by 20bp each. This indicates an inherent assumption of expected pick up in tax compliance in FY20.

• For GST, we expect e-way bill implementation to contribute to 10bp expansion in centre’s GST collection to GDP ratio (post general election in May 2019) – bringing it to a probable growth of 15% yoy as against 18% projected.
• Also, for compliance on income tax to pick up, we believe the government continues to rely on demonetisation benefits, which may be hard to materialise, thus restricting expansion of income tax collection to GDP ratio upto 10bp instead of the projected 20bp.

Considering actual Dec 2018 fiscal numbers along with FY19RE - implied asking rate for Q4FY19E looks even more exorbitant on revenue as well as capex side and we see a possibility of miss on both accounts leading to additional arrear payments and/or off-balance sheet financing to meet FY19RE for fiscal deficit.

Few observations on fiscal math in light of Dec 2018 numbers

• FY19YTD (Dec 2018) fiscal deficit is 111% of FY19RE released in the union budget on 1 Feb 2019. Though Dec 2018 saw a fiscal surplus of Rs152bn, the same was led by 1% yoy decline in overall expenditure (led by weak capex), rather than strong  tax collections.
• Indirect tax collection remains weak with 1% yoy FYTD19 decline (led by weak GST collections), rendering Q4FY19E GST tax collection growth rate at 59% yoy (in order to meet FY19RE). Direct tax collection asking growth rate for Q4FY19 also remains ambitious at 30% yoy; we see a downside risk to FY19RE here (similar to that observed in Q4FY18).
• FYTD19 capex fell 10.5% yoy, leaving Rs1trn to be spent on capex in Q4FY19, in order to meet capex target of FY19RE, which looks tough. Q4FY18 capex stood at Rs271bn.
• Ministry of agriculture saw 20% yoy growth in FYTD19 expenditure, highest across ministries – Indicating higher rural spend by the government.
• We expect government to miss FY19RE tax collection target on GST and income tax collection, which implies weak capex momentum and possibly increased arrear payments by the government.

With a possible slip in revenue collections, higher gross borrowing, expected lower OMO’s in FY20 and higher off-balance sheet financing, we see crowding out of private investment in bond markets along with an upward bias on 10-year yields. We expect 10-year yield to trade at 7.3-7.8% yoy for most of FY20.

Our previous relevant notes on these topics can be found here:

Our detailed Budget note:

Our note on high frequency economic scorecards on various segments of economy:

Our take on rural consumption drivers: