Budget 2021: ICRA pegs fiscal deficit at 7.5% of GDP in FY21, 5% for FY22

India's fiscal deficit is expected to be around 7.5 per cent of the GDP for the current fiscal owing to slump in revenue collection due to the economic disruption caused by COVID-19 pandemic, according to ICRA. This would be a 100 per cent jump from the Budget estimate of 3.5 per cent of GDP pegged for financial year 2020-21.

Given the revenue shock engendered by the pandemic, ICRA expects the central government's fiscal deficit to widen to Rs 14.5 lakh crore or 7.5 per cent of GDP in FY21. The agency has projected the state governments' fiscal deficit at 4.7 per cent of gross state domestic product (GSDP) in FY21, indicating a general government fiscal deficit of around 12.2 per cent of GDP.

In the Union Budget 2020, Finance Minister Nirmala Sitharaman had pegged the fiscal deficit at Rs 7.96 lakh crore or 3.5 per cent of the GDP. The Budget last year had pegged the gross market borrowing, which is also a reflection of fiscal deficit, at Rs 7.80 lakh crore for the current fiscal.

For FY22, ICRA has estimated the revenue deficit to be around at 3.5 per cent of GDP and fiscal deficit at around 5 per cent of GDP. This which would provide enough space to the government for prioritising health expenditure, vaccine rollout as well as capital spending, based on the revenue rebound that is widely expected, the rating agency said.

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In the backdrop of economic uncertainty, ICRA expects government to avoid tax changes at this juncture and urges to focus on maximising disinvestment proceeds in the upcoming Union Budget 2021.

"In our view, sharp fiscal tightening should be avoided by both the Centre and the state governments, as it would temper the awaited economic recovery. Moreover, revenue normalisation would anyway ease the fiscal strain in FY22," ICRA said in its report on Budget expectation.  

In terms of absolute numbers, ICRA has pegged net tax revenues at Rs 15.5 lakh crore, non-tax revenues at Rs 2.5 lakh crore and disinvestment proceeds at Rs 1.5 lakh crore in FY22. Assuming a revenue deficit of 3.5 per cent of GDP (around Rs 7.8 lakh crore, based on its estimate of nominal GDP) and a fiscal deficit of around 5 per cent of GDP (around Rs 11.1 lakh crore) implies space for revenue expenditure and capital expenditure of Rs 25.8 lakh crore and Rs 4.8 lakh crore, respectively, in the coming fiscal.  

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"The Fifteenth Finance Commission's recommendations on revenue sharing and fiscal deficit targets, the borrowing permission to be granted by the GoI, and the extent of improvement that can be realised in their own tax revenues, will guide state fiscal trends in FY22," it said.

As per the report, fiscal deficit target of 3.5 per cent of GSDP for the state governments for FY22, may allow them to prioritise a portion of the capital expenditure that had to be deferred during the pandemic, and provide some funds towards projects under the National Infrastructure Pipeline (NIP).

Meanwhile, ICRA expects GDP to witness a turnaround in FY22, with around 10.1 per cent growth in real terms, in contrast to the 7.8 per cent contraction expected in FY21. It expects the Union Budget for FY22 to assume a nominal GDP growth of 14-15 per cent in FY2022, higher than the 10 per cent assumption that was made in the Budget for FY21. It has projected nominal GDP growth at Rs 194.2 lakh crore for FY21 and Rs 221.4 lakh crore for FY22.