Govt may need to peg deficit at 7% of GDP
- The government on February 1, 2020 used the trigger mechanism of the FRBM Act to deviate from the fiscal deficit road map by 0.5% for 2019-20 and 2020-21 (3.8% and 3.5% respectively) in order to boost the economy.
The government may have to draw up a new fiscal consolidation road map by keeping the fiscal deficit at a higher level of about 7% of the gross domestic product (GDP) in the forthcoming budget given lower revenue receipts and the urgent need to raise public expenditure to push growth, audit and consulting firm EY India said in its latest edition of Economy Watch.
“Centre’s GTR [gross tax revenue] is expected to contract in FY21, after having already contracted in FY20. Centre’s non-tax revenue and non-debt capital receipts have also fallen well below their corresponding budget estimates. Given these lower receipts, the fiscal deficit may have to be kept at a relatively high level, say, about 7% of GDP, to ensure that government expenditures do not fall in line with the fall in receipts so as to support growth,” EY India’s chief policy advisor DK Srivastava said in the report.
Fiscal deficit is the gap between government’s total income and total expenditure. In the last budget, the government on February 1, 2020 used the trigger mechanism of the Fiscal Responsibility and Budget Management (FRBM) Act to deviate from the fiscal deficit road map by 0.5% for 2019-20 and 2020-21 (3.8% and 3.5% respectively) in order to boost the economy. It also projected a fiscal deficit of 3.3% for 2021-22. But that was before India, and the world, were ravaged by the Covid-19 pandemic. It has taken a toll on the economy, calling for increased spending by the government.
But some finance professionals think the finance minister might not push the fiscal envelope too much.
Shanti Ekambaram, group president, consumer banking at Kotak Mahindra Bank Ltd said, “The budget will try to balance the twin objectives of stimulating growth and managing fiscal deficit. Demand stimulus measures are also important but given the fiscal situation, there could be limited headroom available.” She expects that the forthcoming budget to keep the fiscal deficit around 5% to 5.5% of GDP in 2021-22.
“With expenditures supported by strong nominal growth, optimism on tax collection and the government’s aggressive estimates for disinvestment and non-tax proceeds, we expect the fiscal deficit target to be set at 5.3% of GDP in FY22,” securities firm Nomura said in its India Budget Preview. According to the firm, lower revenue and higher spending are likely see the fiscal deficit widen to 6.8% of GDP in 2020-21, nearly double the original budget target of 3.5%.
The EY report expects Budget 2021-22 to focus on reviving the economy. The pandemic and the 68-day-long lockdown imposed to slow its spread, the restrictions that continue on account of the pandemic, and the fact that people are still worried (as they should be) about venturing out or travelling are expected to see the economy contract by 7.7% in 2020-21, an estimate from the National Statistical Office said.
The report does not expect immediate boost to growth in terms of policy rates cut by the Reserve Bank of India (RBI) as inflation measured by the consumer price index (CPI) is expected to remain high at 6.4% in 2021, which is above the upper tolerance limit of the monitory policy framework of 6%. This will put the entire responsibility of financing a growth and a recovery on the forthcoming budget .
Although, CPI inflation softened to 4.6% in December 2020, it averaged 6.6% for the nine-month period of April-Dec 2020, the report said. “Using actual data for the first three quarters and RBI’s expectation for the last quarter, the annual CPI inflation rate may turn out to be 6.4% for 2020-21,” Srivastava said. “Since this is higher than the upper tolerance limit of the Monetary Policy Framework, the expectation is that the monetary authorities may not be forthcoming with any further relaxation in repo rate in the near future. Policy stimulus to the economy is therefore largely dependent on fiscal authorities.”
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