ICRA’s Pre- Budget Expectations

New Delhi, January 23, 2018: The Union Budget for FY2019 needs to balance competing expenditure priorities and the demand for lower direct and indirect tax rates, while attempting to maintain fiscal discipline. We expect this budget to utilise fiscal space to enhance spending rather than reduce direct taxes. In our view, the Government of India (GoI) is likely to budget a fiscal deficit for FY2019 between 3.2-3.5% of GDP, which would be only modestly lower than the revised estimate (RE) for FY2018.

The prolonged transitional issues following the Goods and Services Tax (GST) signal that the GoI’s indirect tax revenues will undershoot the FY2018 budget estimates (BE), if one strips off the Integrated GST (IGST) collections that do not entirely belong to the Central Government. Although the GST Council would decide on any changes in GST rates, the tax growth assumed by the GoI would provide a hint as to whether further reductions in tax rates are forthcoming. The average price of the Indian basket of crude oil is likely to rise to US$65-70/bbl in FY2019 from US$56-59/bbl in FY2018. This would generate pressure on the government to reduce excise duties to temper inflation, while simultaneously pushing up the fuel subsidy by up to Rs. 88-93 billion relative to the BE for FY2018.

An assessment of the revenue buoyancy after GST and the extent, to which the recent reforms have widened the tax base, would critically influence the fiscal space for increasing spending or reducing the corporate tax rate that the Union Budget for FY2016 had promised. Realistically, a step-down in the corporate tax rate may be introduced only in conjunction with paring of exemptions, to maintain revenue neutrality. We expect this budget to utilise fiscal space to enhance spending rather than reduce direct taxes. The FY2019 budget may increase the allocations for social infrastructure and social security spending, such as NREGA, food subsidy, insurance schemes and welfare pensions. We also expect enhanced outlays for rural and urban infrastructure, such as affordable housing, roads, railways and ports. Moreover, budgetary allocations for capital spending are likely to be supplemented by extra-budgetary sources of funds such as institutional finance and market borrowings of the CPSEs, as well as the NIIF.

News reports suggest that the Third Supplementary Demand for Grants indicated that Rs. 800 billion would be infused by the GoI into public sector banks (PSBs) through issuance of recapitalisation bonds in FY2018. We welcome both this front loading, and the transparency associated with the infusion being made directly by the GoI, even as additional details are eagerly awaited. Interest on the recapitalisation bonds may need to be provided in FY2019. Following the uptick in bond yields in Q3 FY2018, PSBs are faced with mark-to-market (MTM) losses, which would add to their operating losses and erode their capital ratios, thereby increasing the magnitude of capital infusion required from the GoI. Overall, PSBs must be adequately capitalised to be equipped to fund the uptick in investment growth that is expected to set in during H2 FY2019. Read more

Corporate Comm India(CCI Newswire)