India: Reversal of fiscal consolidation – Standard Chartered

Analysts at Standard Chartered are expecting the FY20 deficit to come in at 3.8% of GDP for the Indian economy, overshooting the 3.3% target.

Key Quotes

“Slippage is inevitable, in our view; we estimate that spending cuts of INR 2.1tn (1.0% of GDP) will be insufficient to offset a tax and non-tax revenue shortfall of INR 2.9tn (1.5% of GDP). As a result, we expect FY20 to see a reversal of India’s fiscal consolidation path.”

“Deeper-than-expected spending cuts could limit the FY20 deficit to 3.6% of GDP. However, this would have a negative impact on already-weak GDP growth. In order to cut FY20 expenditure by INR 2.5tn (1.2% of GDP) – instead of the INR 2.1tn we expect – Q4-FY20 spending growth would have to slow to less than 5%, below our expectation of 8% (it was c.12% in the first eight months of the fiscal year).”

“A positive revenue surprise from divestment proceeds or telecom sector revenue-sharing is unlikely in FY20, in our view; these revenue sources are likely to provide more support in FY21. Even a smaller-than-expected 3.6% deficit in FY20 would be a reversal of the fiscal consolidation path followed since FY12.”

“We expect the FY21 fiscal deficit target to be set at 3.6% of GDP (or 3.5% if slippage in FY20 is less than we expect). The FY21 target will depend on the actual FY20 deficit and whether the government decides to provide another round of economic stimulus in FY21.”

“An income tax cut to boost consumer demand could widen the central government’s FY21 deficit by 0.2-0.5% of GDP from our baseline scenario of 3.6%. These estimates are based on two potential tax-cut scenarios: (1) if tax rates were lowered for all taxpayers and exemptions are not phased out, we would estimate the impact at c.0.5% of GDP; (2) if the tax cut were restricted to lower income earners (below INR 2mn) and exemptions were not phased out, we would estimate the impact at 0.2% of GDP. Given limited fiscal space, we think the second scenario is more likely.”