Statsguru: 24% GDP contraction and enormity of Centre's fiscal challenge

The grim news of a 24 per cent contraction in India’s quarterly gross domestic product (GDP) is old now. But its impact on the finances of the central government is going to linger along the year. To cushion the debilitating blow, the Centre, till July, has done its part to keep expenditure at the desired levels despite a precipitous fall in revenues. 
 

Chart 1 shows that revenue spending (minus interest outgo) has grown 17 per cent in the first four months of the financial year, against the budgeted growth of 11 per cent. Capex, however, has remained at last year’s level, and needs to grow at 25 per cent in the remainder of FY21 now. 




Rural employment, income support to farmers, compensation to states were the priority spending areas in the first trimester of FY21, shows chart 2. Note that this compensation is the delayed payment for FY20—due to shortfall in goods and services tax collection by states. At the same time, areas such capital purchases for defence, education and roads, spending has been lower than last year. 







Till this point, things look good. The revenue position, however, is so stressed that Centre’s share in gross tax revenues (GTR) would need to grow at 20 per cent in the remaining eight months of FY21, if it wants to maintain the fiscal balance, chart 3 reveals. Against the expected growth of 9 per cent, its tax revenues have fallen 34 per cent in April-July FY21. 

For the states, a comparatively modest fall appears to be a relief. However, the required growth rate is similar, at 16 per cent. Further, states will lose in terms of devolution—which is a share of GTR—once the revised estimate of GTR falls below the current budgeted level. 

 

Knowing that its budgeted target is unattainable, the Centre has already expanded its borrowing program for the year, and borrowed a massive Rs 3.3 trillion in just two months: July and August, as chart 4 shows. Yet, yields on long term government bonds are firming up once again, underlining the shallow levels of confidence in the financial markets. 

The National Institute of Public Finance and Policy has come up with studied projections on Centre’s fiscal balance in FY21. If annual expenditure is kept unchanged from the budgeted Rs 30 trillion, a worst-case scenario can push Centre’s fiscal deficit to 8.1 per cent of GDP, it shows (chart 5). A hopeful scenario keeps it between five and six per cent; but for that to happen, the remainder of FY21 needs to counter the contraction in revenues in April - July to some extent, which is a big challenge.