Covid-19 impact: Centre’s FY21 fiscal deficit seen at 5% or higher

A buoyancy of 0.3 under the conditions mentioned above, for instance, would result in a deficit level of 5.2% (Budget) and 6.6% (including off-Budget spending).

If the budgetary expenditure for FY21 has to be maintained at the same level as budgeted, the Centre will have to allow a huge fiscal slippage from the budgeted 3.5% of the GDP and incur a fiscal deficit of 5% or higher, owing to the Covid-19 fallout of a much-reduced economic growth and consequent sluggishness in tax receipts.

FE has estimated that just the two high-probable eventualities of nominal GDP size in FY21 being some 4% less than the budgeted Rs 225 lakh crore and a net tax revenue (NTR) shortfall of over Rs 3 lakh crore from the budgeted level could inflate FY21 fiscal deficit to a discomfiting level of 5.1%.  This assumes that tax buoyancy in FY21 would be 0.5, the same level as in FY20 (revised estimate).

Add off-Budget financing of certain government schemes and borrowings by not-on-their-own PSUs like FCI on behalf of the government, and the actual FY21 deficit would be an awful 6.5%.

It is very much possible that the tax buoyancy will fall further from this level (in fact, even FY20 buoyancy would turn out to be less than the RE), widening next year’s fiscal deficit further. A buoyancy of 0.3 under the conditions mentioned above, for instance, would result in a deficit level of 5.2% (Budget) and 6.6% (including off-Budget spending).

In the event the GDP growth next fiscal turns out to be even lower – this cannot be ruled out; Nomura has estimated the FY21 real GDP growth for India in the range of ( -)0.5% to 0.5% — the deficit would obviously be even graver. Take the nominal GDP growth rate at 4%, which appears to be in sync with the Nomura estimate, the budgeted deficit would be 5.3% at 0.5 tax buoyancy and, including off-Budget spending, the actual deficit would be over 6.7%.
The gravity of the imminent fiscal slippage would be better appreciated against the fact that consolidated fiscal deficit of the Centre and the states in FY19 was estimated at 5.8% – Centre 3.4% and states 2.4%. States are likely to report some slippage in FY20 and the Covid-19 crisis could exacerbate their fiscal positions in FY21. So, we may be looking at consolidated gross fiscal deficit of 8-9% in FY21, with the actual deficit (including off-Budget) even higher at near double-digit levels. Clearly, the FRBM mandate is being besmirched.

To be realistic, the government may not have the option of compressing spending in a serious manner in FY21 given the economic crisis and its obligation to give succor to the underprivileged and small businesses during the pandemic period and its aftermath. Even if other engines of the economy like private consumption and investments resume dramatically post-FY21 and buoyancy rises a bit, the kind of fiscal slippage that now looks imminent would make restoration of credible fiscal consolidation difficult in the short-term.

FE has computed the FY21 deficit as follows: April-January tax collection trend, the virtual postponement of Vivad Se Vishwas scheme and a likely blow to tax receipts in March from Covid-19 would together create a shortfall in net tax revenue or NTR (after devolution to states) of some Rs 2.1 lakh crore. So, the FY20 NTR could be around Rs 12.9 lakh crore, against Rs 15.05 lakh crore budgeted (RE). Tax revenue growth in FY21 over this base could be just 3% if the buoyancy is 0.5; the FY21 NTR could, therefore, be around Rs 13.3 lakh crore, against Rs 16.4 lakh crore budgeted, a huge shortfall of Rs 3.1 lakh crore. The shortfall could be even higher at Rs 3.2 lakh crore if the buoyancy is 0.3.

Also, assuming that second advance estimate of FY20 nominal GDP at Rs 203.9 lakh crore) holds good (it still may despite the Q4 GDP likely to be lower than estimate due to the GDP deflator), a 6% nominal growth will result in a GDP size of around Rs 216 lakh crore in FY21, against the budgeted Rs 225 lakh crore. The significant decline in the size of denominator will statistically increase the fiscal deficit expressed as its fraction. (Recently, Moody’s and State Bank of India have steeply cut their estimates of India’s real GDP growth for FY21 to 2.5% and 2.6%, respectively).

There are, of course, many imponderables at the moment. First, the Centre may have to spend even more than the budgeted expenditure in FY21 to combat Covid-19 (it has already announced a package for the poor whose impact on the Union budget is around Rs 1 lakh crore). It may have to come out with more steps if the pandemic proves to be catastrophic. While the option of regulating other expenses to balance this outgo, which was not foreseen when the Budget was prepared, is there, if the spending obligations increase exponentially, this would not be feasible.

The Centre could net some Rs 1.5 lakh crore over the budgeted net tax receipts, if it chooses to use the additional room created to hike fuel duties by Rs 8 per litre, over and above the Rs 3-per-litre hike already implemented.

The Centre can also mitigate the damage on the fisc from Covid-19 to an extent by tapping the cess/surcharge route to augment in non-shareable tax receipts. It has been doing so in recent years; the revised estimates for FY20, for instance, show a much lower growth in tax transfers to states, compared with that of Centre’s net tax receipts.
Also, it is unclear at this stage whether the budgeted disinvestment and other non-tax proceeds for FY21 could be fully realised.