The Union government’s move to raise its gross borrowing programme for the current financial year ending March 31, 2021 from Rs 7.8 lakh crore to Rs 12 lakh crore clearly signals that India’s fiscal deficit is expected to rise sharply. This comes as the country faces headwinds on both revenue and expenditure side in the backdrop of the COVID-19 pandemic and the nationwide lockdown that has crippled various sectors hard.
In a bid to curb the coronavirus outbreak, the country has been in a lockdown since March 25 and some level of activity has only just begun in green and orange zones identified, depending on the number of cases. With large swathes of the economy locked down, the government will face a huge deficit in tax revenues and disinvestment proceeds are also likely to miss targets as it will be extremely difficult to sell stakes in state-owned companies, amid volatile capital markets and an expected global recession that will dent investor appetite.
The government has already announced a Rs 1.7-lakh crore welfare package for the poor and economists say the higher borrowing programme suggests another stimulus package for the economy could be announced soon.
In the budget, the government had targeted a fiscal deficit of 3.5 per cent of the GDP. However, with revenues falling and the gross borrowing programme increased by over 53 per cent, economists now see India’s fiscal deficit shooting up to nearly 6 per cent or possibly even more.
“The government’s decision to finally raise its market borrowings by over 2 per cent of GDP signals its acceptance that the fiscal deficit will slip by materially more than is allowed under the escape clause,” Dushyant Padmanabhan, strategist at Nomura Securities said on Monday.
The escape clause in the FRBM (Fiscal Responsibility and Budget Management) Act allows the government to breach the fiscal deficit by 0.5 per cent during times of several stresses in the economy.
“It also signals that a second fiscal support package is around the corner. While, this suggests a FY21 fiscal deficit of 5.5-6.0 per cent of GDP, we expect the central government’s fiscal deficit to expand to 7 per cent of GDP in FY21, double its original target,” said Padmanabhan.
Nomura slashed India’s real GDP growth targets to -5.2 per cent for the current financial year, from -0.4 per cent it had projected earlier. “We now expect year-on-year growth to remain negative for three consecutive quarters–with growth faltering to 1.5 per cent in Q1 2020 (January-March) before plunging to -14.5 per cent in Q2 (April-June) and then weakly recovering to -6.0 per cent in Q3 (July-September) and -1.5 per cent in Q4 (October-December),” he said.
Aishwarya Sonker, economist at JM Financial, sees India’s fiscal deficit touching 6.3 per cent this financial year. “The enhanced borrowings provide the government much needed flexibility on compensating it for the expected shortfall in tax and non-tax revenue while dispensing some quantum of instantly required fiscal stimulus to provide cushion to the faltering economic activity,” said Sparsh Chhabra, economist at Centrum Broking.
According to Chhabra’s calculations, a loss of Rs 3.5 lakh crore seems “inevitable” from receipts side, while taking into account an expected shortfall of Rs 2 lakh crore from tax and non-tax revenue and Rs 1.5 lakh crore shortfall from disinvestments.
The government’s move to increase taxes on petrol and diesel though is likely to help garner Rs 1.2-1.4 lakh crore, he added.
Credit ratings agency CARE Ratings also sees fiscal deficit rising to 5.5 per cent of GDP. “There are clear signs of government finances being affected by the shutdown as revenue has ebbed and expenditure pressure will be there through the year even after the lockdown is withdrawn,” it said.
The government’s disinvestment target of Rs 2.1 lakh crore for this year looks very difficult now and the best that could be done is to have one PSU buying into another as the main targets Air India and BPCL (Bharat Petroleum) may not get right valuations given the state of industries, it added.
