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The fiscal outcome for FY20 turned out to be much weaker than what the Central government had estimated in February 2020. Its fiscal deficit spiked to ₹9.4 trillion, or 4.6 per cent of GDP according to the provisional actuals for FY20, from the Revised Estimate (RE) of ₹7.7 trillion, or 3.8 per cent of GDP. Very little of this fiscal slippage can be blamed on Covid-19. However, the spread of the pandemic, and various measures announced to reduce its impact, have wreaked havoc on the outlook for government finances for FY21.
The fiscal year 2020-21 has commenced poorly. News reports indicate that direct tax collections of the Centre contracted by about 25 per cent as on June 17, 2020, broadly in line with our GDP forecast for the first quarter (Q1) of FY20. While the economic outlook remains uncertain, we are hopeful that the worst of the revenue shock will be contained in Q1 FY21.
Based on the anticipated compression in non-discretionary consumption and income levels following the pandemic, we forecast the gross tax revenues of the Centre at ₹16.9 trillion, 30 per cent lower than the Budget Estimates (BE) for FY21, and 15.7 per cent lower than the provisional actuals for FY20. A substantial portion of this shortfall would be borne by State governments through lower tax devolution to them.
On a positive note, we forecast the gain to the Central government from the recent excise duty hikes on petrol and diesel at around ₹1 trillion above the FY21 BE. Building this in, and adjusting for the higher-than-warranted tax devolution to the States in FY20, ICRA expects the net tax revenues of the Centre to fall short of the budgeted level by ₹3.9 trillion.
The state of the telecom sector remains feeble, and non-tax revenues from this source are likely to considerably trail the budgeted level, if the Supreme Court allows 20-year payment terms for the AGR (Adjusted Gross Revenue) dues. The current volatility in market conditions and intermittent risk aversion may prove dire for big-ticket disinvestment. Overall, we expect the non-tax revenues and disinvestment proceeds to fall short of the FY21 BE by 2.2-2.3 trillion.
The fiscal support under the ‘Aatmanirbhar Bharat Abhiyan’ is estimated at a modest one per cent of GDP. The previously enhanced outlay for MGNREGS, and the newly launched Prime Minister Garib Kalyan Rojgar Abhiyaan would refocus the spending of the government on rural areas that have received large numbers of returning migrants.
A portion of the higher expenditure may get funded by the savings released by the spending restrictions imposed on various ministries and departments, which have recently been extended to Q2 FY20. Moreover, it has been clarified that the amount remaining unspent in a particular month/quarter will not get automatically carried forward to the next month/quarter. While this highlights the extent of the government’s resolve towards spending restraint, it poses a downside risk to our forecast of a 5 per cent contraction in real GDP in FY21.
Bank recapitalisation
It remains unclear whether the Centre will provide funds for bank recapitalisation in FY21, to address concerns regarding the impact of the decline in economic activity on potential NPAs (non-performing assets). Even if it does, recapitalisation bonds are likely to be a below-the-line item, which would not affect the fiscal deficit.
On balance, ICRA’s base case is that the Central government’s fiscal deficit for FY21 will surge to ₹13 trillion or 6.7 per cent of GDP, from the budgeted level of ₹8 trillion or 3.5 per cent of GDP. The anticipated fiscal slippage exceeds the extent to which the government’s planned market borrowings for FY21 have already been augmented, suggesting that the market should be prepared for another upward revision, especially if further fiscal support measures are announced.
One major source of fiscal uncertainty persists. We are certain that the requirement for the GST compensation to be provided to the State governments, will dwarf the funds available through the specified GST compensation cess in FY21. However, the extent of funds towards GST compensation that the Centre would provide to the State governments from its own sources, remains unclear.
We estimate the gap between the available past and current collections of the GST compensation cess, and the requirement for GST compensation (both for FY21 and what was pending for FY20 at end-March 2020), at a mammoth ₹3.9 trillion. If the Centre provides half of these funds from its own sources in FY21, its fiscal deficit would surge to a discomfiting 7.7 per cent of GDP.
However, if the GST Council decides to borrow funds from the market backed by a guarantee from the Centre, to compensate the States, then the Centre’s FY21 fiscal deficit and market borrowings would be spared.
The writer is Principal Economist, ICRA
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