Economy

Fiscal deficit to balloon to 7.9 per cent in FY21: Report

PTI Mumbai | Updated on May 14, 2020 Published on May 14, 2020

Representative image   -  Getty Images/istock.com

The Government has announced an additional borrowing of around 2.1 per cent of GDP

With the Government’s Rs 20 lakh crore stimulus package, the country’s fiscal deficit is likely to be more than double to 7.9 per cent in the current financial year, according to an SBI research report.

The report had earlier estimated the fiscal deficit to be 3.5 per cent of the gross domestic product (GDP) this fiscal.

The Government has announced a cumulative package of Rs 20 lakh crore, which is nearly 10 per cent of GDP to provide relief to various segments of the coronavirus-hit economy.

“After taking into account cash outflow of these measures as well as the previous and the recent excise duty hike and DA freeze (amounting to around 0.8 per cent of GDP), we now revise our baseline fiscal deficit (excluding extra budgetary resources (EBR)) to 7.9 per cent of the revised GDP in FY21 from 3.5 per cent earlier, owing to lower revenues and higher expenditure against the backdrop of Covid-19 pandemic,” the SBI’s research report Ecowrap. said.

Baseline fiscal deficit based on CSO’s earlier estimates of GDP is around 7.1 per cent of GDP, it added.

“We estimate a 4.5 per cent direct impact on fiscal deficit purely because of revenue shortfall / automatic fiscal stabilizer and a 0.9 per cent indirect effect because of GDP change,” the report said.

The government Rs 20 lakh crore package includes Rs 1.7 lakh crore of fiscal stimulus announced in the first phase, Rs 5.6 lakh crore stimulus provided through various monetary policy measures and Rs 5.94 lakh crore through the second phase, implying Rs 6.70 lakh crore package is still to be announced.

“The cumulative actual fiscal impact is only around Rs 1.14 lakh crores or 0.6 per cent of GDP,” the report said.

The Government has announced an additional borrowing of around Rs 4.2 lakh crore or 2.1 per cent of the GDP.

The report further said with higher deficit, the issue of a sustainable debt limit arises.

The Government debt as a percentage of GDP has been on a rising trend since FY11.

In the last eight years, government debt has risen from 62 per cent in FY11 to 66 per cent in FY19. During the same time period interest rate (repo rate) has declined from as high as 8.5 per cent to as low as 6 per cent, the report said.

In FY20, the repo rate was reduced further to 4.4 per cent.

“This raises two related questions: how much government debt can India sustain? Does the decline in nominal interest rates following the possible financial crisis originating due to Covid-19 mean that the government can safely borrow more?” it said.

It said there have been studies which show that if the difference between interest rate and nominal growth rate is negative then there is no level of debt which is unsustainable, that is the government can borrow easily.

Only if the differential becomes positive then the question about maximum sustainable debt exists.

“Thus, in India as we expect the ratio to become positive by end-FY21, we would have to look into the upper limit of debt which is sustainable. Against this background, it is imperative that we give growth a definite push,” the report added.

Published on May 14, 2020

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
fiscal deficit
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.
Govt extends deadline for import of additional quota of urad till May 31
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.