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India Should Not Strictly Target Fiscal Deficit At 3.5-3.6 % For FY 21: SBI Ecowrap

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India Should Not Strictly Target Fiscal Deficit At 3.5-3.6 % For FY 21: SBI Ecowrap
Aparajita Gupta - 17 January 2020

New Delhi, January 17: India should not strictly target fiscal deficit at 3.5 to 3.6 per cent levels for FY21, as such number would imply a lower amount of absolute fiscal deficit for FY21 that would again be non-transparent and non-credible to markets, suggested SBI Ecowrap in its analysis on pre-Budget expectations.

Net borrowing and gross market borrowing for FY21 are expected to be around Rs 5.5 lakh crore and Rs 7.85 lakh crore respectively. If more switches happen in the run up to budget, gross market borrowing can reduce further, it said.

“We propose a uniform fiscal consolidation path beginning FY22 that would reduce fiscal deficit by 20 basis points every year till FY25. There is always the option in the interregnum of undershooting our deficit target as growth comes back to the system and this would be a market delight,” the report stated.

India’s fiscal deficit for FY20 is expected at 3.8 per cent of GDP on the back of reduced revenue receipts and low GDP growth. However, this assumes a Rs 2 lakh crore expenditure compression that must be strictly avoided at any cost if a growth recovery is envisioned. Hence, it would be beneficial if the expenditure cut is restricted to not more than Rs 1.5 lakh crore and that could push fiscal deficit to 4 per cent of GDP in current fiscal (Rs 1 lakh crore for fiscal deficit of 4.3 per cent of GDP). For next year fiscal deficit is projected at 3.8 per cent of GDP.

For the agriculture sector the report suggested that the government must take advantage of 92 per cent digitisation of land records and ensure that the PM KISAN scheme reaches all the 14.6 crore farmers. Simultaneously, the government could provide a glass of milk in mid-day meal income for 100 million children by engaging 16 million dairy farmers with additional income and ensure a Poushtik Bharat. Finally, the government must ensure that tenant farmers are registered with a tenancy certificate so that they can also access the formal sources of money.

The report stated that for the salaried class, it might be a myth of not proving tax relief to 4 per cent of people paying taxes since they contribute a significant part to overall consumption and in FY19 overall their gross taxable income is estimated at Rs 46 lakh crore, 41 per cent of the overall private final consumption expenditure. It might also be a better idea to incentivise savings for the salaried class with hike in Section 80C that could generate at least five times more household savings into retirement corpus than revenue foregone by the government!

For NBFCs, it said RBI could seriously think of being the lender of last resort by providing liquidity against assets of NBFCs. A formal arrangement could be made with Government of India of adjusting any haircut in the process with dividend transfers. Secondly, there could be deferment of principal repayments by systematically Important 50 NBFCs and HFCs for a specified period. This would be adequate to reinstate cash flows and ensure PM’s vision of Housing for All by 2022.

There are around 41 million senior citizens term deposits accounts in the country with total deposit of Rs 14 lakh crore / 7 per cent of India’s GDP. The average deposits size per account is around Rs 3.3 lakh and interest income from such deposits forms 5.5 per cent of Private Final Consumption Expenditure in FY19. It is imperative that government exempts such interest income from taxes / or increase the threshold limit.

“Overall, we also expect the Budget to provide a roadmap for aggressive monetisation of assets and ensure an end to amount of fund stuck in litigation. Our estimates suggest that the total stock of such Government assets that could be monetised could be at least Rs 28 lakh crore or 15 per cent of GDP! Additionally, it is now high time that the rules across Income Taxes and regulators are streamlined that has resulted in spiraling of litigation cases,” the report added.

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