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MOSL: ECOSCOPE | Pre-Budget III: Why will 2020-21 be more challenging year?

ECOSCOPE | Pre-Budget III: Why will 2020-21 be more challenging year?

 

• In this third and final report of our pre-budget series, we discuss the factors that make the Union Budget 2020-21 very challenging. In FY20, while net taxes are likely to grow only ~3% (v/s budgeted growth of 25.3%) and divestment proceeds will also be likely only 50-60% of the target (down 30% from FY19), total receipts are still expected to grow 6% YoY, primarily helped by unexpectedly large dividends from the RBI amounting to INR1.48t. Besides, the cumulative rate cuts of 135bp in CY19 will help the government save ~INR600b on its interest payments. Together, thus, the RBI provided a massive support of INR2.1t (or 1.03% of GDP) in FY20, which went almost unappreciated.
• Things, however, will be different in FY21. Even if we assume disinvestment proceeds of INR1t and higher growth of ~10% in (net) tax receipts, the absence of the RBI's support can turn out to be an offsetting factor. With (a) the banks parking excess funds (averaging INR1.9t till 24th Jan'20) at the RBI's liquidity adjustment facility (LAF) window v/s average LAF deficit of INR459b last year and (b) no room for further rate cuts, the government is unlikely to receive as large a support in FY21. Also, if the RBI provides an interim dividend this year, the surplus next year will be even lower.
• Overall, notwithstanding expectations of better GDP growth next year, total receipts could grow slowly at only ~4% YoY in FY21 vis-à-vis expected growth of 6% this year. Assuming an unchanged fiscal deficit of 3.5% of GDP, spending growth would also be lower at 6.6% next year, as against ~7% this year. The budgeted estimates (BEs) to be presented in the budget on 1st Feb'20, however, could be very different from these estimates.