Budget 2019: Sitharaman to go easy on fiscal target, increase off-budget spending

At the start of its second innings, the re-elected Narendra Modi governmnet will loosen its purse strings and raise its fiscal deficit target in the Union Budget on Friday in an attempt to revive the slowing economy and boost investments.

This budget will be a test to maintain fiscal prudence for new Finance Minister Nirmala Sitharaman who is widely expected to implement populist measures announced before the elections. But the big question remains about where the money will come from at a time when tax revenues have shrunk.

After years of self-imposed fiscal deficit targets, the Indian government has in the recent past, managed to keep that under check mostly through higher fuel taxes and cuts in subsidies.

But a big shortfall in tax collections in the last fiscal year due to weak economic growth - causing unemployment to rise to a 45-year high and stagnant average household income may prompt Sitharaman to introduce further stimulus.

“Given the constraints, we expect a 2019-20 deficit target of 3.4-3.6 percent of GDP—though some spending is still likely to be pushed off-balance-sheet. The new administration is likely to renew focus on public infrastructure, affordable housing, and agriculture,” noted Bruce Kasman, J.P. Morgan’s head of economic research.

The Reserve Bank of India has lowered interest rates thrice so far this year. However, that easing has had little impact, as commercial banks are reluctant to transfer the benefits of lower rates to the borrowers, pressuring the central government to do the heavy lifting in reviving growth.

The country’s fiscal deficit has already surpassed mid-way through the target in just first two months of the fiscal year starting April. Coupled with that, the pre-election assurances mentioned in the interim budget in February will widen the gap further.

Economists expect Sitharaman to revise the country’s fiscal deficit target to 3.5-3.6 percent, higher from to 3.4 percent projected in the interim budget.

“We estimate India's F2020 central government fiscal deficit to widen slightly to 3.5 percent of GDP in the Union Budget next week amid increased scope of farmer income support scheme,” noted Morgan Stanley in its research note.

Although the rise in fiscal deficit can be negligible, most of the economists think that the government would undertake higher expenditure besides what the budget speaks of, often termed as an 'off-budget expenditure', to project better fiscal discipline.

In recent years, the tendency to resort to off-budget expenditure to meet spending needs has gone up.

In the past decade, governments have used a variety of means to shift spending away from the budget. These include having state-run companies issuing special sovereign bonds, recapitalization of bonds given to banks and obtaining loans from public organisations.

These borrowings raise questions about the government's fiscal math, economists said.

"Off budget spending is not a good practice. It's like how banks pretended NPAs were lower until ex-governor Raghuram Rajan showed them a stick and asked to report full non-performing assets'," said independent economist Ashutosh Datar.

"Unless somebody does that to the government of India and asks to report the true fiscal deficit, governments will continue with this practice for the foreseeable future."