India’s fiscal deficit may climb to 7.6% of GDP in FY21; economy likely to contract this much in Q2

The high fiscal deficit may take place due to 18 per cent on-year contraction in total receipts and 8 per cent growth in total spending.

The central government’s fiscal deficit may significantly rise in the current fiscal year due to a fall in revenue and rising expenditure to support lives and livelihoods amid the pandemic. The fiscal deficit in FY21 may rise to Rs 14.6 lakh crore, which is 7.6 per cent of GDP, said the EcoScope report by Motilal Oswal Financial Services. The high fiscal deficit may take place due to 18 per cent on-year contraction in total receipts and 8 per cent growth in total spending, the report added. It also said that notwithstanding the massive contraction in economic activity, the revised projections for core inflation is now at higher levels of 5.9/5.4 per cent from 5/2.3 per cent earlier.

The firm said that as government spending is expected to be highly skewed toward revenue spending this year and consequently, the capital spending could fall up to 3 per cent. Further, the real GDP is projected to shrink by 7 per cent on-year in the ongoing quarter, which is worse than the earlier forecast of 4.7 per cent contraction. The projections in the EcoScope report is, however, better than the growing consensus of another double-digit decline in real GDP in Q2 FY21. For the full fiscal year, the firm has projected a GDP contraction of 6.5 per cent, marking the worst fall in the past seven decades.

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Meanwhile, India’s fiscal deficit breached the full-year target in April-July as the lockdown hit the government’s revenue and shot up the expenditure. The gap between revenue and expenditure reached Rs 8.21 lakh crore, or 103 per cent of the budgeted estimate, during the reported period. However, the rise in fiscal deficit was expected as amid the low revenue generation, the government announced various packages, including an Atma Nirbhar Bharat package worth Rs 21 lakh crore, to steer India away from the disruptions caused by the coronavirus pandemic.

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