India budget: stability over growth

Transcription

1 Economics India budget: stability over growth DBS Group Research 12 January 217 India is likely to meet its fiscal deficit target of 3.5 for FY16/17 on higher revenues In targeting a narrower deficit of 3 for FY17/18, India is adhering to its fiscal consolidation roadmap There is a possibility for deficit target to be widened into a range of to slow the pace of belt-tightening Budget FY17/18 is also the platform from which India moves forward with reforms to improve the budget process Rating agencies remain positive on India but are not in a hurry to lift its debt rating up the investment grade ladder India will table its FY17/18 (Apr17 to Mar18) budget on 1 February. Despite the negative impact on growth from the demonetisation, fiscal discipline will remain a priority. The government is likely to meet the fiscal deficit target of 3.5 for FY16/17, as bunched-up revenues catch up with front-loaded expenditure in the second half of the FY. We expect the government to retain the budget deficit target of 3 set by the fiscal roadmap for FY17/18 (Chart 1). Achieving this target will depend on whether nominal GDP growth for FY17/18 comes in stronger as expected. The Fiscal Responsibility and Budget Management (FRBM) committee might propose a shift in the budget deficit target from a point to a range. If adopted, the deficit target may be revised to %. In turn, this could provide flexibility for more public investments to offset the drag on growth from the recent demonetization move. Chart 1: Central government's fiscal targets -2-4 Chart 2: Revenue & expenditure progress % of annual target, Apr-Nov Targets Fisc def Revenues Tax revs Non-tax Expd Radhika Rao (65) radhikarao@dbs.com Refer to important disclosures at the end of this report. 1

2 FY17/18 budget will mark a few firsts The budget presentation has been brought forward by a month to 1 February. This will allow capital outlays and revenue mobilisation to start timely from April 1, right from the start of the FY instead of later in the second quarter. Next, the railway and union budgets will be merged for the first time in a century. Thirdly, expenditure will be reclassified as capital and revenue spending instead of plan and non-plan. This will provide a clear distinction between productive and recurrent spending trends. Focus will also fall on the FRBM committee s proposals such as a deficit target range, streamline expenditure groups and other reporting changes. Also under consideration is a shift to a calendar year but this wide-ranging change is unlikely to happen before Catch-up in FY16/17 revenues to bridge the fiscal gap FY16/17 fiscal targets are within reach The risk of a fiscal slippage in FY16/17 is low despite the budget deficit totalling 86% of the full-year target in Apr-Nov16. Over the remainder four months, we expect revenues to catch up with spending. December and March are seasonally strong months for direct tax revenues. Most indirect tax revenue sub-heads are running above their budgeted pace (Chart 3). Indirect collections as a percentage of total tax revenues is likely to exceed direct receipts this year (Chart 4). Revenues will increase from one-off sources. The Income Declaration Scheme (IDS), which ended last September, added an estimated INR 25bn (.2% of GDP) to revenues. There will be strong dividends of INR 66bn (.4) from the Reserve Bank of India (RBI). Other non-tax sources, telecom spectrum collections and divestment receipts will also add to the kitty, but miss targets. Revenues will get a short-term boost from demonetisation. Over 95% of the scrapped notes are reportedly back with the banks. Of the remaining 5%, changes in the RBI s balance sheet might result in a one-off dividend (of.1-.2) for the government, if deemed justified. Another declaration scheme is underway with the benefits to accrue next year. On the spending front, funding for bank recapitalization and pay commission are unlikely to deviate from projections. With revenues coming in higher and spending on track, FY16/17 deficit target will be met at 3.5. Chart 3: Strong indirect tax collections % YoY 5 Chart 4: Share of indirect taxes on the rise as % of total Budgeted FY16/17 Apr-Nov Corp tax Income tax Customs duty Excise duty Services tax 35 Direct as % of total taxes Indirect as % of total taxes FY8 FY1 FY12 FY14 FY16 2

3 Unfortunately, the final deficit ratio/gdp ratio could still be upset by the growth outlook which is far from certain because of the demonetisation. While the Central Statistics Office reckoned that nominal GDP growth could come in at 11.9% for FY16/17, above the budgeted 11%, this remains an estimate that could be downgraded later. Another challenge is the GDP deflator which is assumed to be 4.8%, above the underlying CPI/ WPI trends. GST implementation will be in focus in FY17/18 FY17/18 fiscal roadmap to be retained India is likely to adhere to its roadmap for fiscal consolidation and retain its budget deficit target at 3 for FY17/18. There is a possibility for the FRBM committee to introduce some flexibility with a proposal to adopt a deficit target range of % instead of a fixed target. If so, this could slow the pace of belt tightening. As for next year s fiscal math, indirect tax collections should continue to drive total tax revenues. Excise duties the largest component of indirect taxes at 2 could suffer if oil prices rally sharply and trigger fuel duty cuts. An outright cut in personal income tax rates is unlikely, but exemptions and slabs might be tweaked. Corporate tax rates are already scheduled to be lowered by 5% to 25% over the next three years. Non-tax revenues will continue to rely on RBI/public sector companies dividends and privatisation with the latter consistently missing targets. Reports suggest tweaks to the long-term capital gains taxes might also be on the cards. Expenditure will emphasize on boosting consumption after the post-demonetisation lull. The government has, ahead of the budget, already announced a host of measures last month. These included relief measures for farmers, affordable housing schemes, support for women/elderly and interest sops. These are likely to amount to less than.1. More sector-specific measures to reverse the slump in demand are likely. These are likely to be funded more through one-off revenues, including from demonetisation. Capital expenditure has stagnated in recent years (Chart 6). Capital spending was cut last year to make room for higher public-sector wage payouts and banks recapitalisation. We expect capital spending to be raised to 1.8%-2.% of GDP, with part of these outlays kept off the books. Revenue expenditure will stay high, with interest payments and subsidies making up for a considerable chunk, along with banks capital needs. Fiscal impact of demonetisation and GST The impact of the demonetisation will continue to reverberate into FY17/18. Much of the structural benefits of a smaller parallel economy and less illegal Chart 5: Revenues breakdown 1 DBSf FY15 FY16 RE FY17 BE FY18 BE Capital rcpts (incl divests) Non-tax Net tax rev Chart 6: Capital expenditure stagnates 4.5 Revenue expd Capital expd BE

4 money will accrue over the medium-term. In the near-term, much of the boost to revenues will be from the one-off declaration scheme and enhanced tax scrutiny. The additional revenues from these measures may total.7-.8% of GDP over the next two-three years. India is targeting to roll out its Goods and Services Tax (GST) a key indirect tax reform from 1 April or 16 September. This depends on how quickly the implementation issues are resolved. Apart from the legislative approvals, it is necessary to set up the ecosystem i.e. the framework, documentation, accounting, infrastructural, IT/software and the education of users. In theory, the GST is revenue-neutral. In practice, there will be some fiscal buoyancy for states and the central government. The GST panel has, based on trends, suggested a 47:53 revenue-sharing arrangement between the central and state governments. This implies that the central government s share in the pool of tax revenues will rise at the expense of the states. Hence, states will be compensated for revenue losses in the first five years. The decision on the proportion of revenue-sharing is, however, still pending. The other areas of the Budget will focus on tax reforms, steps to support agricultural output, social sector spending, push for infrastructure investments, accelerate usage of digital payment channels and promote financial inclusion. Rating upgrade unlikely this year Positive rating agencies but an upgrade is still sometime away Encouraged also by its stable fiscal ratios, international rating agencies have maintained a positive outlook towards India. Wide-ranging reforms (including demonetisation), underlying growth drivers, low inflation and other improving fundamentals have been cited as the economy s key strengths. The scope for an upgrade, however, remains low in the near-term. To move up the investment grade ladder, India needs to address the ongoing stress in the banking sector, the slow implementation of reforms such as the GST, and the still-high fiscal deficits in the centre and at the states. The door for an upgrade in 218 remains open. The government must persist with fiscal discipline and roll out reforms more smoothly. Apart from the banks needing to improve their balance sheets, the economy will also have to regain its growth momentum from demonetisation. Sources All data are sourced from CEIC Data, Bloomberg, Indian government agencies and press reports. Transformations and forecasts are DBS Group Research. 4

5 Recent Research Rates: SGS: US-dependent 1 Jan 17 IN: is oil the next headache? 13 Dec 16 Qtrly: Economics-Markets-Strategy 1Q17 8 Dec 16 ID: FDI much stronger than it appears 3 Nov 16 EZ: ECB challenged by higher bond yields 16 Nov 16 TW: 7 likely outcomes in Nov 16 Global: revenge of the demographic dividend 14 Nov 16 US: structural interest rate compression 2 Nov 16 FX: mid-quarter update 1 Nov 16 SG: down but not out 1 Nov 16 Rates: global rates roundup 31 Oct 16 TW: diversifying into Southeast Asia 21 Oct 16 CN: cyclical bottom 19 Oct 16 IN: assessing current account 18 Oct 16 improvement PHgov bonds: expensive (still) 11 Oct 16 SGD: sticking to neutral 7 Oct 16 EZ: not taper time yet 7 Oct 16 CN: avoiding the Minsky moment 6 Oct 16 IN: monetary policy committee lowers rates 4 Oct 16 Qtrly: Economics-Markets-Strategy 4Q16 15 Sep 16 CNH: SDR inclusion - right time, right place 8 Sep 16 IN: savings rate in need of a boost 2 Sep 16 IDR: towards further resilience 1 Sep 16 SGS: on Fed watch 3 Aug 16 Global growth: redefining strength 26 Aug 16 TW: 5 things you need to know about the 18 Aug 16 aging population SG: risks beneath the GDP figures 18 Aug 16 CN: the risk of keeping status quo 17 Aug 16 CN: why falling private investment growth 12 Aug 16 is a worry ID: tax revenues slipping 11 Aug 16 SG: labour market pain 1 Aug 16 IN: monetary policy in transition 8 Aug 16 FX: DM vs EM - a more balanced story 1 Aug 16 Rates: Global rates roundup / chart-pack 1 Aug 16 IN: hopes high for GST 26 Jul 16 JP: will the helicopters fly? 2 Jul 16 ID rates: steepening risk 18 Jul 16 IN: more consumption-led growth 13 Jul 16 FX: revisions to GBP & JPY 8 Jul 16 TW & KR: how low can rates go? 7 Jul 16 US: a risky mantra 4 Jul 16 PH: Duterte s game plan 4 Jul 16 EZ: dealing with post-brexit blues 3 Jun 16 SG: Brexit impact limited for now 28 Jun 16 Britain s Great Leap Backward 27 Jun 16 Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts and tables are CEIC and Bloomberg unless otherwise specified. DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore Tel: Company Registration No E. 5