India Ratings and Research (Ind-Ra) believes a slew of measures announced in the financial year 2018-19 budget to address the woes of agricultural sector is a step in the right direction. Besides agriculture, the other area where the FY19 budget focused is physical infrastructure, especially transport.
However, the outlay on health and education witnessed only marginal increase despite the announcement of an ambitious health care programme. Under this healthcare scheme, the proposal is to provide health insurance cover of Rs 5 lakh to 10 crore vulnerable Indian families. Given that the government expenditure on health has hardly increased in the FY19 budget, it is still not clear as to how it will be funded and rolled out.
As FY18 revised estimate shows fiscal slippage, a new roadmap has been announced for the fiscal consolidation. The revised total expenditure-to-GDP ratio at 13.2 percent for FY18 is higher than the budgeted 12.7 percent. Disaggregate data suggests that the higher expenditure was mainly due to a higher revenue expenditure. This shows up in the revised revenue deficit number which shot up to 2.6 percent of GDP as against the budgeted 1.9 percent of GDP in FY18.
This has led to deterioration in the quality of deficit, measured as percentage of revenue deficit in fiscal deficit. Quality of fiscal deficit, which had improved to 59.1 percent in FY17 from 71.6 percent in FY15, again deteriorated to 73.8 percent in FY18 and it has been budgeted at 66.6 percent for FY19.
Ind-Ra notes that actually the fiscal deficit would have been even higher than the revised estimate of 3.5 percent of GDP but for the compression carried out in the capital expenditure during FY18. The revised capital expenditure/GDP ratio came in at 1.63 percent as compared to the budgeted 1.84 percent for FY18. This is certainly not a good news for those who were pinning hopes on the stepped up government capex to not only expand the productive capacity but also revive the private corporate investment cycle in the Indian economy.By accepting the recommendation of the Fiscal Reform and Budget Management Committee, the FY19 Medium Term Fiscal Policy Statement states that the central government will simultaneously target debt and fiscal deficit with fiscal deficit as an operational target. Ind-Ra, however, believes the target for debt sustainability and reduction should be primary deficit and not fiscal deficit.
From the point of view of debt sustainability two items that are critical are primary deficit (fiscal deficit net of interest payment) and rate spread (difference between the nominal growth of the economy and average interest rate on debt stock). During FY04-FY11, a higher spread in combination with low/positive primary balance brought down the debt/GDP to 65.6 percent in FY11 from 83.2 percent in FY05. Thereafter, due to the lower rate spread and sustained primary deficit, the debt/ GDP has again increased.
Even as a number of fiscal indicators point towards worsening of fiscal health in FY18, the net-tax/GDP ratio has shown sustained improvement since FY16. As per FY18 revised estimate, it improved to 7.6 percent from 6.9 percent in FY16 and is budgeted to increase to 7.9 percent in FY19. However, it is still lower than the pre-global financial crisis level of 8.8 percent.
The revised estimate of tax collections – both for direct and indirect tax collection – turned out to be higher than the budget estimate for FY18. The key reason for the setback to the government finances in FY18 from the revenue side came from the non-tax revenue head particularly the head dividend/surplus of the Reserve Bank of India/public sector banks and financial institutions. Ind-Ra believes the pressure on fiscal arithmetic in FY19 may again arise from the non-tax revenue side but from the head-license fees from the telecom companies/spectrum payment.
With improving growth prospects, on the whole Ind-Ra feels achieving the assumed nominal growth of 11.5 percent in FY19 do not look difficult and hence the deficit targets.India Ratings and Research, a wholly owned subsidiary of Fitch Group, is a SEBI and RBI accredited credit rating agency operating in the Indian credit market