Government likely to let budget deficit rise as tax receipts fall short

Government likely to let budget deficit rise as tax receipts fall short

New Delhi, Jun 21: The government is likely to overshoot the budget deficit target previously set for the current fiscal year, three officials have warned, as a slowing economy creates a big shortfall in tax collections and prompts new stimulus plans.
New finance minister Nirmala Sitharaman presents her first budget on July 5, for the fiscal year ending March 2020. It is also the first budget of Prime Minister Narendra Modi’s second term after his government was returned in a landslide election win last month.
Since becoming prime minister in 2014, Modi succeeded in improving public finances, trimming the fiscal deficit to 3.4% of gross domestic product (GDP) from 4.5% in 2013/14, mostly through subsidies cuts and fuel taxes.
He is now, however, under pressure to loosen the purse strings to follow through on election promises such as increased spending on roads and housing and tax cuts for companies and individuals.
“There is no other option but to defer the fiscal consolidation target as boosting economic growth and reviving private investment is our top priority,” a senior finance ministry official involved in the budget discussions, said.
Such a decision would ultimately be made by the Prime Minister’s office after consultation with advisers, he said.
That may well mean raising the fiscal deficit target to as much as 3.6% of GDP from an already upwardly revised target of 3.4%, set in February’s interim budget, he said. The original goal, set in February 2018, had been 3.3%. India’s benchmark 10-year bond yield pushed up by another 3 basis points to 6.87% following the Reuters story, traders said. Yields had closed at 6.79% and had been up due to gains in global crude prices.
Slipping fiscal discipline would hurt the “credibility” of the budget and in turn hit investment, the bond market and the rupee, analysts say.
“If the (fiscal) target does slip by 10 or 20 bps it will be seen as a setback,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai.
He said bond markets are particularly vulnerable given they still assume the government will maintain the deficit target from February’s interim budget due to a higher expected dividend from the central bank’s capital reserves.
Difficult circumstances
Officials said the main factor behind the expected slippage is a big shortfall in net tax collections that could exceed Rs 1 lakh crore ($14.36 billion) or about 6% of the initial target set in February’s interim budget.
That puts the government in a particularly difficult place given recent signs of economic weakness, which has put political pressure on Modi to inject rapid fiscal stimulus.
Such measures would include increased infrastructure spending and tax incentives to corporate and individual taxpayers to boost private investments and consumer demand, the officials said.
Last Saturday, Modi met state chief ministers and advisers to discuss possible stimulus and ways to grow GDP to $5 trillion by 2024, from about $2.7 trillion in the March quarter.
A 3.6% deficit target would free up about Rs 42,000 crore ($6.03 billion) to cut tax rates or offer new investment sweeteners, another official said.
A finance ministry spokesman declined to comment for this story.
In pre-budget consultations, economists, government advisers, think-tanks and officials have suggested “sector specific-packages” for small businesses, food processing, electric vehicles, exporters, the tourism industry, farmers and the rural sector, rather than general tax cuts, the first official said.
In the last fiscal year, tax revenue slumped more than 11%, forcing the government to cut spending by more than Rs 1.45 lakh crore in the current fiscal year to meet the 3.4% of GDP deficit target, said an official in the budget division.