Budget 2021: How bad is the fiscal deficit situation?

India's annual budget is always a highly anticipated event, but interest in the impending fiscal year 2022 is heightened in wake of economic disruption caused by COVID-19 pandemic. While the country's financial blueprint will be released by the government on February 1, it would be interesting to see if Budget prioritise growth-oriented measures over fiscal considerations.    

As per the first advanced estimate of the GDP, real GDP will contract by 7.7 per cent in FY21, and nominal GDP growth is pegged at -4.2 per cent. Based on the current trends in the GDP, the fiscal deficit, difference between the government's total revenue and total expenditure, is expected to be around 7.5 per cent of the GDP for the current fiscal owing to moderation in revenue collection due to the COVID-19 crisis. This would be a 100 per cent jump from the Budget estimate of 3.5 per cent of GDP, or Rs 7.96 lakh crore, pegged for the current fiscal. Hard-pressed for funds to combat the coronavirus pandemic, the government had in May increased its market borrowing programme for the current financial year by more than 50 per cent to Rs 12 lakh crore.   

According to Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India (SBI), the fiscal deficit is expected to be around 7.4 per cent of GDP, or Rs 14.46 lakh crore, for the fiscal ending in March. "Current trends in the GDP for FY21 is expected to translate into Rs 3.2 lakh crore net revenue shortfall for the Centre this fiscal and at the same time expenditure is higher by around Rs 3.3 lakh crore, thus taking the fiscal deficit to Rs 14.46 lakh crore and with new revised nominal GDP estimate for FY21 it will be around 7.4 per cent of GDP," Ghosh said in a SBI Ecowrap report.    

For FY22, assuming the government keeps the expenditure growth at 6 per cent over FY21 estimates and overall receipts (excluding borrowing and other liabilities) expected at 25 per cent, it would result in fiscal deficit of around Rs 11.67 lakh crore or 5.2 per cent of GDP, as per SBI Ecowrap report. The net market borrowing of the Centre has been pegged at around Rs 8.8 lakh crore and with repayments of Rs 2.7 lakh crore gross borrowing expected at Rs 11.5 lakh crore. With states' gross borrowing around Rs 9.4 lakh crore total gross market borrowing would be around Rs 20.9 lakh crore, but could have a clear downward bias, the report noted.   

The fiscal situation of the states is equally stretched but tad better than what was being anticipated. As per SBI report, states will end with an overall shortage of around Rs 3 lakh crore in tax revenue. Overall for FY21, states had budgeted a gross fiscal deficit of Rs 6.26 lakh crore or 2.8 per cent of GDP. However COVID-19 related slowdown in state revenues and decline in SGDP numbers can push the state fiscal deficit to 4.7 per cent, it said.   

Given the fiscal constraints, the revival strategy will have to carefully factor in the resource crunch and yet be imaginative to finance growth. Push to infrastructure such as roads, civil aviation and agriculture will be a well advised strategy. The economist at SBI has suggested that there must not be any new taxes in the upcoming budget, instead it should have a tax holiday, with carefully crafted policies for immediate fiscal lubrication. This could include an honest attempt by the government to settle the tax litigation cases once and for all and also ensure all pending payments to parastatal entities are made in a time bound manner. This could be the biggest game changer.

Also Read: Budget 2021: Will COVID-hit aviation sector get a revival package?

Also Read: Budget 2021: Will FM Sitharaman balance between growth and inflation?