When Budget numbers don’t add up

Some projections look exceedingly optimistic while others lack clarity

Union Finance Minister Arun Jaitley’s third Budget, which promised to meet daunting fiscal deficit targets without powering down the economy has been received with a mix of cheer, and disbelief, reports The Wall Street Journal.Indian stocks have gained more than 5% in the past two sessions as optimism has grown that the central bank will cut interest rates as the Reserve Bank of India Governor Raghuram Rajan’s pre-condition of a contained deficit has been met.

At the same time, critics who feared the government would throttle back on growth have been silenced. Chief Economic Advisor Arvind Subramanian described Jaitley’s balancing act managing the two priorities as a “magic trick.” But as the finer details of the Budget emerge, doubts are growing about the robustness of the numbers.

Analysts say some projections look exceedingly optimistic while others lack clarity. The Wall Street Journal looks at a few such examples that economists say appear too good to be true and could force government finances to go astray.

Disinvestment
Before the budget, there was widespread belief that the government would sharply scale back next fiscal year’s revenue target from the sale of minority stakes in state-run companies. After all, not once has the target been achieved in the past six years, either by the current or the previous government. The shortfall all these years has been staggering: most recently, the government raised Rs 253.13 billion ($3.7 billion) in the current fiscal year ending this month, barely a third of the Rs 695 billion target announced in last year’s budget.

For the next financial year, Jaitley has set a target of Rs 565 billion. Although smaller than in the last budget, economists say the number still is too big. “We doubt that this revenue objective will be met, given that the sale of these equity stakes often requires lengthy regulatory processes as well as favorable market conditions,” says BMI Research, a unit of Fitch.

Spectrum Sales
The government has budgeted Rs 990 billion of revenue from the sale of telecommunications bandwidth next fiscal year. That is large considering this year it raised a little over half of that. Jaitley on Tuesday defended the target, saying it was much lower than the amount the Telecom Regulatory Authority of India has valued the bandwidth due to be put up for sale next year.

Still, analysts believe telecom companies are unlikely to bid as aggressively as they did in previous government auctions. That is because they have piled up debt to pay for those purchases. “Given the outlook on economic activity and stretched balance sheets of Indian telcos, these numbers look very optimistic, especially assumptions on spectrum proceeds,” Religare Capital Markets says. Morgan Stanley estimates Rs 508 billion would have been a more realistic target.

Direct Taxes
One of the main drags on tax revenue this year was from direct taxes–income and corporate–which fell about Rs 460 billion short of the budget aim. A weak economy continues to hurt corporate profits, which could pressure revenue next year as well. Still, the government is hoping it will see an over 12% increase in revenue from these sources to about Rs 8.4 trillion.

“Individually, the budgeted income tax growth appears to be too optimistic and corporate tax collections may also pose a challenge amidst an environment of subdued demand,” says rating firm Crisil, a unit of Standard & Poor’s. Research firm Capital Economics goes a step further, saying that the target for broader tax revenue–including indirect taxes–also looks high, given that state elections in the months ahead could prevent the government from pushing through with an excise tax increase. “Lower-than-expected revenues in FY16/17 could trigger subsequent cuts in spending or a revision to deficit targets at a later stage,” it added.

Pay Hikes
The government has previously announced a 24% increase in salaries of government employees and pensioners, with the bulk of the impact expected next fiscal year. Official estimates previously showed the pay increase would push up government spending by Rs 1.02 trillion. However, Jaitley’s budget fails to make it clear how much of this has been accounted for. Officials have later clarified that about 70% has been accounted. That still leaves a significant amount of money still to be found for the pay increases.

Capital to Banks
Analysts were disappointed by the Rs 250 billion the government budgeted as capital support for state-run banks in the next fiscal year. Although the amount is in line with a plan the government announced last year, investors were hoping it would take note of a recent sharp rise in bad loans that has eroded profitability of many banks. The low capital allocation, “in addition to the lack of any major incremental measures in terms of governance and management reforms for these banks, is a key disappointment,” says rating firm ICRA, a unit of Moody’s Investors Service.