Risk Of Higher Borrowings Fades On Weak Expenditure, Improved Economy

With expenditure in check and some pick-up in receipts, the government may not need to increase its borrowings this year.

Nirmala Sitharaman, India’s finance minister, right, walks through a metal detector as she leaves the North Block of the Central Secretariat building in New Delhi, India, on Saturday, Feb. 1, 2020. Photographer: T. Narayan/Bloomberg
Nirmala Sitharaman, India’s finance minister, right, walks through a metal detector as she leaves the North Block of the Central Secretariat building in New Delhi, India, on Saturday, Feb. 1, 2020. Photographer: T. Narayan/Bloomberg

A frugal approach towards spending so far this year and a recent pick-up in the economy may allow the Indian government to stay away from any incremental borrowing in the fiscal.

While the government stuck to the Rs 12 lakh crore borrowing programme when it announced the second-half plan, markets were concerned that additional borrowing may be needed in the final quarter of the fiscal year. Data of government accounts released so far, however, suggests that aggregate expenditure has remained in check and a revival in the economy has some improvement in tax revenues.

That may help keep the fiscal deficit as a percentage of GDP lower than the 7.7% median estimate of professional forecasters and keep any feared additional borrowings in check.

Expenditure: Frugal Approach

Contrary to expectations and recommendations from economists, who advised higher government spending to support the economy, expenditure so far this year has been only modestly higher than last year.

Total expenditure rose only 0.4% between April and October 2020 on an annual basis, according to data by the Controller General of Accounts.

To be sure, the government found it difficult to spend in the early months of the financial year due to the lockdown. Aditi Nayar, principal at ICRA, expects that expenditure has risen in the second half of the year. Nayar estimates that the government’s total expenditure (excluding recovery of loans) will end the year at Rs 30.2 lakh crore for FY21, mildly lower than the budgeted level.

Data from the CGA shows that of the major ministries government spending remains skewed towards the rural economy and the health sector.

The Ministry of Rural Development saw a sharp hike of 75% year-on-year in the April-October 2020 period, while spending by the Ministry of Communication doubled during the period. Among other major ministries, finance, home affairs, agriculture, and health and family welfare saw small increases in spending.

The biggest expenditure drops so far this year were in housing, petroleum, and women and child development.

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Total Receipts: Still Lagging

While the government has kept expenditure in check so far, its receipts, which had been running well below last year’s level, have seen some pick-up.

GST collections remained above Rs 1 lakh crore for the second consecutive month based on tax for October, collected in November. In addition, a lower-than-anticipated GDP contraction and better-than-expected corporate profits may help in improving tax receipts in the remaining months of the fiscal year.

However, non-tax receipts, including from disinvestment, remain weak at just 30% of budget estimates.

Total receipts are down 24.2% over last year as of October.

Implications For Fiscal Deficit & Borrowings

Devendra Pant, chief economist and head of public finance at India Ratings & Research, said that expenditure trends have not tracked expectations.

“While expenditure has remained flat on an annual basis, non-interest revenue expenditure contracted by 2.9% between April and October 2020 on an annual basis,” he said. This was even as government revenue benefited from an increase in excise and customs duty, accompanied with a decline in devolution to states, he said.

“As such, the fiscal deficit will likely be different from what was expected previously,” said Pant, adding that this would be conditional on whether the economy continues to maintain its momentum. In November, India Ratings had pegged the fiscal deficit at 8.2% of GDP.

The outlook for the fiscal deficit has improved not because of a rise in revenue or greater disinvestments but simply because of the tight leash on government expenditure, said Arvind Chari, head of fixed income and alternatives at Quantum Advisors. “While this was because of the inability of several ministries to function amidst the lockdown, now it is baffling considering the kind of year it has been.”

Chari added that from the bond market’s perspective, this could imply that the government will broadly be able to stick to its borrowing programme. “They have been able to manage their expenditure at the expense of growth and recovery. However fiscal deficit in the next financial year will also be high and we remain years away from fiscal consolidation,” Chari said.

Not everyone agrees that even the fiscal outcome for FY20 will be better than feared. For one, the government has suggested that it would continue to spend.

Govinda Rao, member of the Fourteenth Finance Commission, said improved revenue collections could lead to an increase in the revenue expenditure, while capital expenditure will also have to increase, he said. “On the whole, if there are better revenue collections in the remaining part of the year, that could go towards reducing the cutback in expenditures and both revenue and fiscal deficits will continue to be high,” Rao said.

Rating agencies, too, remain cautious.

Thomas Rookmaaker, director of sovereign ratings at Fitch Ratings, said that the agency’s estimate of the general government fiscal deficit remains subject to uncertainty.

Fitch’s estimate of India’s FY21 general government deficit of 12% of GDP, which covers both the centre and the states, continues to be subject to large uncertainty as the pandemic continues to evolve. Risks to the deficit go both ways, as a higher-than-expected revenue intake would be consistent with a better growth performance, while more relief spending may still be on its way given the lingering pandemic.
Thomas, Rookmaaker, Director - Sovereign Ratings, Fitch Ratings
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