*PhillipCapital India Update*
FY21 Budget Preview
Managed act amid precarious fiscal/economic health
# As widely known, the FY20 final fiscal account will be all about managing expenditure in line with the revenue stream. A shortfall in revenues across all categories will be met by cut in revenue and capital spending – we expect lower cuts in the latter. FY20 fiscal account has the benefit of excess RBI dividend while it suffered on account of subdued economic growth. FY21 is anticipated to be a better economic year, however, we expect FY20/FY21 fiscal deficit to be similar at 3.5% of GDP. Key risks to our estimates will primarily emerge from disinvestment and schedule of telecom AGR payments.
We have been of the view for years that the government should consider fiscal expansion rather than consolidation to elevate Indian infrastructure, rural sector, defence capabilities, and social standards; at that time we didn’t see concerns of a sovereign rating downgrade, as economic growth trends were decent. In the current scenario, when growth is fairly weak, while fiscal expansion will be the key to revive growth, large slippage will also raise the risk of rating downgrades. Thus, we expect minor fiscal slippage in FY20 and a pause in FY21.
# For FY20, the government’s spending focus was strong in defence, health, housing, power, police, MNREGA; roads and railways fared well; agriculture led by PM-Kisan Yojana and other rural/social spend bore the brunt of fiscal pressures. We expect similar trends to persist in FY21 – government will have to manoeuvre between revenue and capital expenditure due to constrained fiscal room. In case of higher disinvestment and lump-sum AGR payments, sectoral spending and fiscal deficit will fare better.
# Bond yields will remain elevated for some time due to fiscal and inflationary pressures. Gross borrowing will remain elevated for the coming years due to large quantum of G-sec maturity. Foreign borrowing is one area that government is yet to tap which can ease pressure from domestic bond yields. Equities have rallied owing to confidence arising from government measures to support growth and bottoming of macro weakness – we concur with this – we have been citing sustenance of green shoots since festive season due to better financing availability, pent-up demand, and high discounting. We hope for continued momentum post budget, last few budgets have been a big dampener for equity markets.
Key thematic expectations for FY21 budget
• Tax benefits for individuals
• Infrastructure focus – railways, defence, housing
• Limited incremental budget-related triggers for rural/social spend – primarily due to fiscal stress; government’s intent is definitely in place
• Strategic disinvestment/privatisation
• Continued focus/steps on sealing tax leakages
• Steps to further aid financial sector (including NBFCs) and MSMEs
Assumptions for FY20/FY21
• Tax-GDP ratio at 10.4% in FY20/21 vs. 10.9% in FY19 and 11.7% in FY20BE.
• Higher dividend from RBI and PSEs in FY20.
• AGR payments by telecom companies: Due to lack of clarity on its quantum/distribution of payments, we have assumed Rs 100bn each for FY20/FY21; assumed that pay-outs will be spread over 5-7 years. A lump-sum payment in FY21 will be a windfall gain for the government.
• Disinvestments will fall short in FY20, strategic disinvestment more likely in FY21.
• Tax revenue growth assumption extremely muted at 2% for FY20 and 9% for FY21.
• Asset monetisation could support capex spend in FY21.
• FY20 subsidy pay-outs to be postponed to FY21; so far food subsidy lagging behind, fertilizers and petroleum subsidy pay-outs are in trend.
• Gross borrowing is estimated to further inch higher to Rs 7.4 trillion.
*For further queries/clarifications, kindly contact your Relationship Manager*