Opinion

Fiscal math portends further increase in market borrowings

Aditi Nayar | Updated on July 02, 2020 Published on July 02, 2020

The anticipated fiscal slippage exceeds the extent to which the GoI’s planned market borrowings for FY2021 have already been augmented

The fiscal outcome for FY20 turned out to be much weaker than the Government of India (GoI) had estimated in February. Its fiscal deficit spiked to ₹9.4 trillion — or 4.6 per cent of the GDP — as per 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 upon 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 has commenced poorly. News reports indicate that the government’s direct tax collections contracted by about 25 per cent as on June 17, broadly in line with the GDP forecast for Q1 FY20. While the economic outlook remains uncertain, we are hopeful that the worst of the revenue shock will be contained in Q1 FY21.

Government revenue

Based on the anticipated compression in non-discretionary consumption and income levels following the pandemic, we forecast the gross tax revenues of the GoI 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 the State governments through lower tax devolution to them.

On a positive note, we forecast the gain to the Central government from the recent hikes in the excise duty levied on petrol and diesel to be approximately ₹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 GoI 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 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.

Release of funds

The fiscal support under the “Atmanirbhar Bharat Abhiyan” announced by the GoI is estimated at a modest 1 per cent of GDP. The previously enhanced outlay for MGNREGA, and the newly launched Prime Minister Garib Kalyan Rojgar Abhiyaan would refocus the spending of the government on the 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 toward spending restraint, it poses a downside risk to our forecast of a 5 per cent contraction in real GDP in FY21.

It remains unclear whether the GoI will provide funds for bank recapitalisation in FY21, to address concerns regarding the impact of the decline in economic activity on potential NPAs. 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 GoI’s fiscal deficit for FY2021 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 GoI’s planned market borrowings for FY2021 have already been augmented, suggesting that the market should be prepared for another upward revision, especially if further fiscal support measures are announced.

GST uncertainty

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 FY2021. However, the extent of funds towards GST compensation that the GoI 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), at a mammoth ₹3.9 trillion. If the GoI provides half of these funds from its own sources in FY2021, 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 GoI, to compensate the States, then the GoI’s FY21 fiscal deficit and market borrowings would be spared.

The writer is Principal Economist, ICRA

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Published on July 02, 2020
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