Budget 2019: Experts remain skeptical on govt's fiscal deficit targets

The interim budget presented by finance minister Piyush Goyal on Friday announced a slew of big benefits for the middle-class and farmers, without letting the fiscal deficit slip more than 10 basis points than what had been forecast. Goel even said the government would stick to the glide path of targetting 3 per cent fiscal deficit by 2020-21. But, economists and debt fund managers are not convinced on the maths, and are worried over the huge borrowing programme and the revenue targets, which some term ambitious. 

Goel in the budget announced tax rebates for the middle-class with annual income up to Rs 5 lakh and a new income scheme for farmers, for which around Rs 75,000 crore has been estimated for 2019-2020 and Rs 20,000 crore for the current year. Yet, the government largely has pegged the fiscal deficit at 3.4 per cent of the country’s gross domestic product (GDP) for the current financial year and the next. 

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“The estimate of incomes and expenditure, which I am presenting today, pegs the fiscal deficit of year 2019-20 at 3.4 per cent of GDP. We would have maintained fiscal deficit at 3.3 per cent for year 2018-19 and taken further steps to consolidate fiscal deficit in year 2019-20. However, considering the need for income support to farmers we have provided Rs 20,000 crore in 2018-19 RE (revised estimates) and Rs 75,000 crore in 2019-20 BE (budget estimate). If we exclude this, the fiscal deficit would have been less than 3.3 per cent for 2018-19 and less than 3.1 per cent for year 2019-20,” said Goyal in his budget speech. 

However, given the huge outgoes that are expected in the wake of the various schemes and tax sops that have been announced, economists remain skeptical on how the government is going to achieve its stated targets.

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“The bond market is bit circumspect on the underlying revenue assumptions to maintain the current fiscal deficit at 3.4 per cent of GDP in next year as well,” said Saibal Ghosh, chief investment officer at Aegon Life Insurance. 

The ten-year benchmark government bond yield rose to 7.60 per cent from 7.49 per cent.

“From the fiscal deficit angle, the borrowing is higher than expected and the revenue sources might be seen as ambitious. Concerns over fiscal deficit pressure may cause bond markets to remain cautious,” said Killol Pandya, head of fixed income at Essel Mutual Fund. 

The worries are relevant given that GST collection has trailed targets for most months in the current financial year and the government is still no where closer to achieving its disinvestment targets for the year, even as the borrowing programme remains huge.

“The key focus among other things for bond markets was the fiscal math. While the fiscal deficit as percentage of GDP has been pegged at 3.4 per cent, the gross borrowing programme of Rs 7.10 lakh crore has spooked market sentiments. Market is also worried about how the revenue side estimates will actually pan out,” said Lakshmi Iyer, chief investment officer (debt) at Kotak Mahindra Asset Management. 

In the budget speech, Goyal remained confident of crossing the divestment target of Rs 80,000 crore in the year-ending March 2019. However, data from the Department of Investment and Public Asset Management (DIPAM) shows that as of January 29, the government had realised only Rs 35,532.66 crore as disinvestment proceeds. 

“The first instalment of the direct benefit to farmers has led to the government missing the fiscal deficit target. However, it has managed well to still have a target to be under 3.5 per cent with the concerns on level of revenue realisation. The actual deficit numbers will depend on the realised GST collections over the next two months and the government’s ability to meet the disinvestment target over a timeline of one month left for actions before the election code kicks in,” said Ranen Banerjee, partner, PwC India.