By Pranjul Bhandari, Paul Mackel & Andre de Silva
Indian Union Budget 2021-22: The government announced a bigger than anticipated fiscal deficit for each FY21 and FY22:
1 A fiscal deficit of 9.5% of GDP for FY21, versus the budgeted target of 3.5% of GDP (HSBC: 7% of GDP).
2 A fiscal deficit of 6.8% of GDP for FY22 (HSBC: 5.8% of GDP marketplace expectation of 5.5% of GDP).
The fiscal deficit is now slated to attain c4.5% of GDP by FY26, (versus earlier target of 3% of GDP by FY24). The states will also be permitted to run larger deficits of 4% of GSDP in FY22 (and about .5% more if some circumstances are met). All of this points towards larger borrowing. The government noted that it will borrow one more Rs 800bn in the final two months of FY21. It also intends to borrow Rs 12.1trn in FY22 (HSBC: Rs 11.5-12trn, marketplace expectation: Rs 11trn).
With this, we estimate that the public sector borrowing requirement of the government has risen from 8.5% of GDP in FY19 to a record 16.1% in FY21. Having stated that, it is essential to look into tax income assumptions, in order to get a more correct estimate of deficit and borrowing. The government has assumed tax revenues contract 10% y-o-y in Q4FY21 (January-March 2021), versus +33% in the quarter earlier (October-December 2020). If rather, tax revenues had been to develop by about 8% y-o-y in Q4FY21, it could lead to .4% of GDP higher net tax revenues for the government. Coincidentally, this amounts to Rs 800bn, the precise quantity by which the government aims to improve its FY21 borrowing. The government can then either cancel the further borrowing, or carry it more than as surplus money balances to FY22.
Even in FY22, the assumption of tax buoyancy at 1.2 underestimates the income possible, in our view. Given the formalization of activity underway, if we get a tax buoyancy of about 1.6, net tax revenues will be .4% of GDP (Rs 840bn) larger. All of this suggests that the fiscal deficit and borrowing could be a shade reduced than estimated in the spending budget, while nevertheless elevated (compared to the Rs 7.1trn gross marketplace borrowing in FY20).
Some of the other numbers look affordable. For FY21, the government has assumed 103% y-o-y development in expenditure in Q4FY21. We believe most of it will be on meals subsidy (expenditure below the National Food Security Act and procurement of meals grains). Alongside, capex is also like to rise, with a concentrate on railways (capital acquisition and railways). For FY22, the nominal GDP development of 14.4% y-o-y is reduced than the 15.4% estimated in the Economic Survey. As pointed out above, the tax buoyancy of 1.2 underestimates the most likely rise in revenues led by formalization. The disinvestment target of Rs 1.75trn is reduced than the Rs 2.1trn budgeted final year, but nevertheless elevated, and will rely on marketplace circumstances and execution. As development recovers, the mix of spending is budgeted to change—gradually moving away from social welfare, towards capex.
FY22: Impact on sectors and the macro-economy
1 Strong capex, weaker rural devote: The Centre’s capex thrust rose sharply in FY21 and is most likely to rise additional in FY22. Collating all expenditures in rural India, we locate the rural thrust has come off a bit, following a massive rise in FY21. This is understandable as the economy rebounds and migrant labourers return to their urban jobs. In specific, the outlays for the demand driven NREGA scheme has been decreased (Rs 730bn in FY22 versus Rs 1,115bn in FY21), even as outlays for the PM Kisan money transfer programme remains unchanged at Rs 650bn.
2 Growth effect: With the expenditure and the fiscal deficit ratios falling in FY22, it appears at initially glance that the fiscal impulse is unfavorable. But this does not account for the improvement in the good quality of expenditure. Indeed, we locate that fiscal multipliers of capex far exceed that of present expenditure.
With capex increasing (by .2% of GDP in FY22 and .6% of GDP in FY21), the development effect might effectively be positive more than a two-year horizon, even with a 2.3% of GDP fall in present expenditure in FY22.
3 Fiscal clean-up: One of the most significant innovations in the spending budget has been the fiscal clean up. Last year’s spending budget had come up with the notion of correct fiscal deficit in which the government had attempted to add the off-spending budget products into the reported fiscal deficit. The correct fiscal deficit was 1.1% of GDP larger than reported deficit in FY20. The major driver of this wedge was the unpaid bills to the Food Corporation of India. In today’s spending budget the government has decided to repay the dues to FCI after and for all. The correct and reported fiscal deficit is most likely to converge in FY22.
4 Debt woes: India’s government debt is most likely to have risen to c90% in FY21. Incorporating today’s fiscal deficit information, the lowering of the debt could be rather gradual to about 85% of GDP in FY25. We think that the scars of the pandemic will start to show after the pent-up demand led rebound fades. Fiscal consolidation through that period can be challenging
Edited excerpts from HSBC Global Research’s India Budget 2021 (dated February 1)
Co-authored with Aayushi Chaudhary, Economist, and Priya Mehrishi, Associate, HSBC Global Research. Himanshu Malik, Asia-Pacific Rates Strategist, and Madan Reddy, Asia FX Strategist, The Hongkong and Shanghai Banking Corporation Limited
Bhandari is Chief Economist, India, HSBC Global Research, Mackel is Global Head of FX Research and Silva is Head of Global EM Rates Research at The Hongkong and Shanghai Banking Corporation Limited. Views are individual