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

  • India’s government is likely to overshoot the budget deficit target previously set for 2019-20, three officials have warned, as a slowing economy creates a big shortfall in tax collections and prompts new stimulus plans.
  • 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 FY14, 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 promises such as increased spending on roads and housing and tax cuts for companies and individuals.
  • 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 Feb 19’s interim budget, a senior finance ministry official said. The original goal, set in Feb 18, had been 3.3%.
  • Officials said the main factor behind the expected slippage is a big shortfall in net tax collections that could exceed INR1tr (USD14.36bn) or about 6% of the initial target set in Feb 19’s interim budget.
  • In FY19, tax revenue slumped more than 11%, forcing the government to cut spending by more than INR1.45tr in 2019-20 to meet the 3.4% of GDP deficit target, said an official in the budget division.
  • Providing a possible boost to overall revenues in the FY20 is an increase in the central bank dividend to INR1tr from INR690bn while the INR900bn in privatisation receipts could be revised upwards slightly, one of the officials said.
  • However, the bigger risk now is that a prolonged slowdown in private investment and consumer demand, as seen in a 20% fall in May 19 auto sales, could erode tax collections even further.
  • Given these constraints, there may be focus on measures that help free up financing to parts of the economy that need it most, particularly small businesses, which account for one-third of GDP.
  • One of the government advisers said there are plans for an additional INR300bn in capital injections to help state banks clean up an estimated USD150bn in bad loans, which would in turn help banks more easily lend.

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