As I indicated yesterday (see here), the advance estimates of
FY20 GDP are at significant variance from the estimates used for the setting
budget targets in July.
The union budget for FY20 presented in July 2019 has apparently
estimated nominal GDP growth at 12.2% for the purposes of calculating deficit
and revenue. A 40% lower nominal GDP growth could distort the entire fiscal
maths of the government. For example, consider the following:
- The union budget estimated the central fiscal deficit for FY20 to be Rs7.04trn or 3.3% of the GDP. This implies a nominal GDP of Rs213.26trn. As per the revised estimates, the nominal GDP for FY20 may be Rs204.42trn only.
As per the latest reports (see
here) the actual fiscal deficit of the central government was already at
Rs7.53trn (or 3.7% of the advance estimates of GDP) by the end of November
2019.
This implies any one or more of the following three scenarios
materializing:
(i) The
government tightens its belt during 4QFY20 by drastically cutting public
consumption and investments. In this scenario, the GDP growth may slip a further
down since in first 3qtrs only higher public expenditure has supported the
growth. The government has in fact already provided some indications of cutting
back on expenses. (see
here)
(ii) The
government may relax the fiscal deficit targets and settles for a higher fiscal
deficit number. Given the poor GST collections, many states have already
requested relaxation in the FRBM targets for FY20. In this case the pressure on
bond yields shall remain high and the scope for further easing by RBI may get
limited.
(iii) The
government is forced to delay payments and refunds thereby further pressurizing
the working capital cycle of the businesses.
- The full impact of the corporate tax rate cuts announced in August is not known and needs to be adjusted in the revenue assumptions of the budget. Besides, slower growth means poor corporate profitability.
The government had budgeted Rs7.66trn of corporate tax
collections which is equivalent to 3.6% of nominal GDP estimated in the budget
making. If we assume a pro rata fall, the corporate tax collection (without
accounting for the tax rate cut impact) may not be more than Rs7.34trn.
Accounting for corporate tax cut impact, the actual situation
may be worse.
- The manufacturing and construction sectors have witnessed the worst slowdown. Given that Automobile and Cement are major contributors to the GST collections, the chances are that GST collection shall fall materially short of the budget estimates.
This essentially means much lower transfer of resources to state
governments and local bodies as compared to the previous estimates. This shall
strain the finances of state government and also the debt rating (...and cost
of debt) for the state governments and local bodies
- Given the lower denominator, the statistics like Debt to GDP, Market Cap to GDP and Subsidies to GDP look much worse than previous estimates. The target to bring subsidies to 1.3% of GDP by FY21 may also be missed.
 |  | ||
No comments:
Post a Comment