A more credible Union Budget - Capital Economics
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A more credible Union Budget

India Economics Update
Written by Shilan Shah
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By bringing large off-balance sheet expenditures back into official spending plans and setting more realistic targets for revenues, the Finance Ministry has presented a more credible Union Budget for FY21/22 than has been the case for several years. While we think that there will still be a bit of fiscal slippage next year, that won’t be accompanied by a surge in bond yields.

  • By bringing large off-balance sheet expenditures back into official spending plans and setting more realistic targets for revenues, the Finance Ministry has presented a more credible Union Budget for FY21/22 than has been the case for several years. While we think that there will still be a bit of fiscal slippage next year, that won’t be accompanied by a surge in bond yields.
  • We published our early thoughts on the Union Budget yesterday. (See our Update, “At last, the Finance Ministry breaks the shackles”, 1st February.) The key point is that the Finance Ministry has finally set aside its desire for rapid fiscal consolidation and has ramped up spending to support the economic recovery.
  • Stepping back, another point that stands out is that the Budget numbers look more credible than has been the case over the past few years. There are two strands to this.
  • The first is that large off-balance sheet expenditures have been reclassified as official spending. The most significant example is payments to the Food Corporation of India (FCI), which maintains and distributes bulk stocks of grains across the country to ensure national food security. Until FY16/17, funding for the FCI came through the Budget. Since then, part of the funding has come in the form of loans from the National Small Savings Fund, a vehicle that is not included in the central budget. (See Chart 1.) This had the result of making the fiscal deficit smaller, despite there being no cut in overall funding. However, payments to the to FCI directly from the Budget have been reinstated with immediate effect. We calculate these payments to be worth 1.8% of GDP in FY20/21 and 0.9% of GDP in FY21/22.
  • The second area of greater credibility is that the Finance Ministry has set more realistic assumptions for revenues. At INR442bn, the monthly GST revenue target has dropped from previous years and is now much closer to what has historically been collected. Meanwhile, in a rare occurrence, the asset sales target has been lowered a touch from FY20/21. (See Chart 2.) Given the disruption caused by the pandemic, there was a legitimate case for pushing planned sales from the current fiscal year would into FY21/22 instead, which would have led to a much higher target.
  • To be clear, revenue assumptions are still in the upper echelons of what looks realistic. On balance, we think there is still likely to be some fiscal slippage next year. But a big revision to the deficit target – which was as large as 1.3% of GDP in the fiscal year prior to the pandemic – now appears far less likely.
  • Bringing all of this together, greater transparency over spending plans and a lower likelihood of significant fiscal slippage compared to previous years should help anchor bond yields by reducing uncertainty.
  • In fact, we think bond yields are more likely to drop back over the coming months, given that the RBI has one eye on the public debt trajectory (which has worsened following the Budget proposals). We don’t think that the RBI is done easing yet. And even if it ultimately decides that the economic outlook doesn’t warrant a reduction in policy rates over the coming months, it may use other tools – such as a ramping up of open market operations – to reduce the yields of long-term government bonds.

Chart 1: Central Government Funding to FCI
(% of GDP, Fiscal Years)

Chart 2: Central Government Asset Sales
(INRbn, Fiscal Years)

Sources: CEIC, Capital Economics

Sources: CEIC, Capital Economics


Shilan Shah, Senior India Economist, shilan.shah@capitaleconomics.com