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Center chooses to stick with fiscal prudence
…but introduces new taxes to garner receipts
* Compared to the Interim Union Budget 2019-20 presented in Feb’19, the headline fiscal numbers remain unchanged. In fact, although the fiscal deficit target for FY20 is reduced from 3.4% to 3.3% of GDP, it is kept unchanged in absolute terms at INR7.04t. The government has budgeted total receipts at INR20.8t (or 9.9% of GDP) and total spending at INR27.9t (or 13.2% of GDP), broadly unchanged from the budgeted estimates (BEs) presented during the interim budget in Feb’19. Accordingly, gross market borrowing (GMB) and net market borrowing (NMB) targets were also kept unchanged at INR7.1t and INR4.7t (INR4.5t including switching and short-term borrowings), respectively.
* The government, however, has introduced a number of new taxes (or surcharge/cess) to garner more receipts and meet its deficit targets. Most notably, a surcharge of 3% is introduced on ‘super rich’ individual earners with taxable income between INR20m and INR50m and of 7% on individuals having taxable income of more than INR50m. Our estimates suggest that the maximum possible receipts from this surcharge would be less than INR80b in FY20. Further, the government has increased excise duty/cess on petrol/diesel by INR2/liter, which could yield another INR260-270b.
* Although the government has presented FY20BEs vis-à-vis FY19REs (revised estimates), it makes more sense to compare FY20BEs vis-à-vis provisional numbers for FY19 (P), which are now available. Compared to FY19P, the government has budgeted 25% YoY growth in total receipts for FY20 (14.2% vis-à-vis FY19RE), which, in our view, appears very ambitious. Accordingly, total spending is budgeted to grow 20.5% this year (13.4% compared to FY19RE).
* Within receipts, the government has reduced goods & services tax (GST) collection to reasonable levels (13.6% growth vis-à-vis FY19P) and corporate income tax growth is also budgeted at an achievable rate of 15.4%. Nevertheless, 23.3% growth in personal income taxes, ~30% growth in union excise duties and ~32% growth in customs are highly aggressive. Further, estimated record dividend receipts of INR575b from nonfinancial public sector enterprises also appear ambitious. Overall, we believe that there could be a shortfall of at least INR500b on receipts in FY20. If so, we expect the government to trim its spending in line with revenue shortfall to maintain its fiscal deficit target.
* Overall, since the government has kept GMB and NMB targets unchanged, we continue expecting the RBI to conduct more open market operations (OMOs) to ease the bond market fears. The announcement of higher participation of foreigners in treasury markets will also help the bond markets.
* Finally, except the excise duty/cess hike on petrol/diesel, there are no measures in the Union Budget 2019-20 affecting inflationary pressures in the economy. Therefore, we continue believing that the reasonable headline fiscal targets and very comfortable inflation will allow the RBI to cut policy rates by 25-50 basis points (bp) in the remaining months of FY20
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