Fiscal Prediction -2019-20

  Fiscal Slippage a necessity to boost growth Given that there is going to be revenue shortfall FY20, it would be a challenge for the government to meet the fiscal deficit target of 3.4% for FY20. The government could try and make up for the shortfall in tax revenues by the following steps: 1) Transfer of surplus RBI reserves to the Government 2) Rollover of some FY20 expenditure to FY21 3) Cut back in plan expenditure 4) Increase in off balance sheet expenditure with portion of subsidies being transferred to state owned enterprise balance sheet Revenue expenditure is budgeted to grow to ` 24.5 lakh cr in FY20 driven by interest payments and social outlays including the “Pradhan Mantri Kisan Samman Nidhi (PM-KISAN)”.
The scope of the PM-KISAN too was recently expanded to cover all farmers which would lead to an increase in outlay from the earlier budgeted ` 75,000 cr. to ` 89,000 cr.
 In the past whenever there has been any pullback in government expenditure it has largely been on the capital expenditure side which is not desirable given the current slowdown in the economy. 

Given the increased social outlay in FY20 and thrust on rural economy it would not be possible for the Government to cut back significantly on revenue expenditure. It may also not be feasible to keep funding subsidies using state owned enterprises balance sheet which have started to get stretched. 
The Government has shown it’s intent to stimulate the rural economy by addressing the agri distress in the interim budget. We now expect that the Government will try and address the slum in consumer spending by providing tax breaks to the middle class which could be either by the way of restructuring the tax slabs or by increasing the tax exemption limit on housing loan interest from current levels of ` 2 lakh. A 10-20bps increase in fiscal deficit will not worry the markets much and some amount of fiscal slippage has already been factored in by the bond markets with the 10 year G-Sec trading at ~110bps above the repo rate as compared to normal spread of ~75bps. 
Given the severity of the NBFC crisis we feel that expansionary fiscal and monetary policy is the need of the hour to revive the economy moving before the slowdown becomes deep rooted and well entrenched given that Inflation is not really a concern at this point of time. 
The RBI if required could infuse liquidity into the system through OMO’s to ensure that higher government borrowing does not lead to crowding out of private investments and to ensure transmission of rate cuts. Markets are still waiting for the final report being prepared by the Bimal Jalan Committee which will give it’s recommendation on transfer of surplus RBI reserves to the Government. 
One time large transfer to the Government could be used for recapitalizing PSU banks along with reducing fiscal deficit. Staggered transfer over the next few years might not allow the Government to recapitalize PSU banks but will definitely address the fiscal deficit which will also be positive for the markets.  

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