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Govts budget assumptions for next fiscal face risks

Govt stares at a weaker revenue mobilization in the next fiscal because of poor performance of Indian companies
The government’s fiscal assumptions in the budget appears to be fraught with hurdles. An expenditure rise is on the anvil even as the government stares at a weaker revenue mobilization in the next fiscal year because of poor performance of Indian companies. The downside risks to the global economy, too, have increased.
On 29 February, finance minister Arun Jaitley will present his third Union budget. His efforts to boost public investment will come at a time when he also has to significantly increase revenue expenditure for the implementation of One Rank One Pension scheme for defence personnel and Seventh Pay Commission.
Direct tax collection, especially corporate tax collections, have remained poor with the government consistently falling short of its budget estimates in the past few years. For 2015-16, the shortfall in direct tax collection is expected to be around Rs.42,000 crore. However, through multiple increase in excise duties on petroleum products, the government will be able to bridge the gap. But in the next fiscal, it is unlikely to get the cushion of falling oil prices and further increase in excise duties may also stoke inflationary expectations.
Meanwhile, corporate profitability is unlikely to improve any time soon. While sluggish economic activity has reduced the demand for key industrial products, weak rural demand has impacted net sales of many firms. A majority of the listed firms on BSE reported a decline in net sales for the fourth consecutive quarter in the October-December quarter, Mint reported on 15 February.
Dhananjay Sinha, head-institutional research, Emkay Global Financial Services Ltd, said a reduction in commodity prices has not translated into better earnings for firms. “The demand scenario remains weak and feeble. Exports are contracting, investment levels remain low and rural demand continues to be weak. Demand can be resurrected to some extent if government announces steps to support public investment in the budget,” he said.
Sinha said corporate tax collections are unlikely to see any significant increase next fiscal because of the high base effect, given that the government increased tax rates for corporates last year. “Also, corporate profitability will remain modest going ahead,” he added.
Uncertainty also comes from the government’s budget calculations for accruals through stake sales in public sector units. Governments over the years have consistently overestimated disinvestment proceeds, achieving targets in only nine of the last 24 years. A shortfall in revenue on this account makes it even more difficult to achieve the fiscal deficit target, forcing the government to cut plan expenditure.
Against a steep target of Rs.69,500 crore in the current fiscal, the government has been able to raise over Rs.13,300 crore so far this fiscal by selling stakes in five public sector units as volatile equity markets played truant and delayed the stake sale plans. On Tuesday, the government’s 5% stake sale in NTPC Ltd got off to a good start. The sale may help the government raise at least Rs.6,000 crore.
Economists and rating agencies widely expect the government to revisit its fiscal deficit target of 3.5% of the gross domestic product (GDP) to accommodate the increase in expenditure demand for both investment and salaries.
Moody’s Investors Service on Tuesday said based on the trends in revenue and expenditure over the last five years, it believes fiscal consolidation remains vulnerable to economic shocks, such as a fall in corporate profits or consumption growth, or an increase in subsidy costs. “Fiscal improvements are likely to be limited in the near term. Whether they occur over the medium term will depend on the successful implementation of policy measures that expand the revenue base and/or curtail expenditure commitments,” it added.
The low nominal GDP number due to a low level of inflation may also continue next fiscal, making budget calculations tricky. Nominal GDP is used to calculate the deficits as well as debt targets which are closely watched by rating agencies and analysts. The statistics department has estimated nominal GDP for 2015-16 at 8.6% against the 11.5% projected in this year’s budget. The government is also under immense pressure to capitalize state-run banks and kick-start growth in private investment and consumption. The government had announced that it will infuse Rs.70,000 crore in state-run banks over four years to help them meet the Basel-III requirements. Of this, Rs.25,000 crore each was earmarked for 2015-16 and 2016-17.
However, most of the state-run banks reported huge losses in the quarter ended 31 December as they were forced to classify and make provisions for bad debt following a directive from the Reserve Bank of India. Profitability of these entities is likely to be impacted in the quarter ended March, too, reducing the scope for them to plough back profits. Global ratings agency Fitch, in a report dated 19 February, said the credit profiles of many Indian public sector banks should come under pressure unless there is meaningful action to restore capital adequacy. Pointing out that state-run banks had to provide more than eight times for the non-performing loans post the RBI directive, Fitch said, “This resulted in a cumulative loss of almost Rs.108 billion ($1.6 billion) in 3QFY16; equating to nearly 43% of the Rs.250 billion capital injection planned by government for FY16. This indicates that there will be limited options for government but to provide more core capital than budgeted,” it added.
The growth projections for the global economy has been consistently lowered over the past few months. The International Monetary Fund (IMF) pared down global economic growth estimate to 3.4% from 3.6% projected earlier for 2016.
While India remains relatively insulated from the slowdown in China and a crash in global commodity prices, it has lost the stimulus from international trade to its economy with merchandise exports contracting for 14 months in a row till January.
“In a context of low growth in global trade in goods, India’s large services export sector (IT services account for around 18% of total exports) provides another source of resilience. Instead, the economic outlook will be primarily determined by domestic factors,” Moody’s said in its report.
HT Mint, New Delhi, 24th February 2016

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