The government’s already strained finances and handling of the economy which has been dented by the Covid-19 pandemic will be put to test as it tries to secure Parliament’s nod for an additional Rs 1.67 trillion for fiscal 2020-21. The money will be used to recapitalise state-owned banks, fight Covid-19 pandemic and fund various schemes announced for vulnerable sections.
“The extent to which savings can be found vide the expenditure management measures that were put in place, will contribute to determining the eventual fiscal outcome for FY21 in light of the ongoing revenue shock of around Rs 6 trillion. Our baseline expectation is now that the Government's fiscal deficit will widen to at least Rs 14 trillion, or 7.4 per cent of gross domestic product (GDP), in FY21,” says Aditi Nayar, vice-president and principal economist at ICRA.
The development comes at a time when the economy is limping back to normalcy after a stringent lockdown that lasted over two months. Most research and rating agencies, in this backdrop, have cut the FY21 growth projections as measured by GDP. On Monday, S&P Global Ratings said that it expected India's economy to contract 9 per cent in FY21, much higher than its previous estimate of a 5 per cent contraction.
Last week, Fitch and Goldman Sachs had slashed their estimates for FY21 GDP growth. While Fitch now expects the GDP to contract 10.5 per cent in FY21 versus its earlier estimate of 5 per cent contraction in this period, Goldman Sachs has forecasted a sharper contraction at 14.8 per cent (-11.8 per cent forecasted earlier) in FY21 and 11.1 per cent (-9.6 per cent earlier) in calendar year (CY20).
“Though there will be an overall increase in the government's borrowing, there is enough liquidity in the system. The Rs 1.67 trillion borrowing if comes though, will increase the FY21 fiscal deficit by around 0.8 per cent of GDP. However, some of these expenses like increased NREGA and Grarib Kalyan Yojana were part of a package earlier and hence would not be beyond what was already buffered in for calculating the fiscal deficit. But, the amount of around Rs 47,000 crore for financing state deficit would be an additional item that was not part of the package and would involve additional borrowing. We could expect the Centre’s fiscal deficit to range between 8 - 8.5 per cent this year allowing for all these expenses,” said Madan Sabnavis, chief economist at CARE Ratings.
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That said, most analysts now draw some comfort from the fact that economic activity in India is reviving. However, they do caution against the stickiness of this recovery over the medium-to-long term.
After briefly plateauing in June-July, the Nomura India Business Resumption Index (NIBRI) – Nomura’s gauge of the pace of economic activity normalisation in the country – has been picking up through August and raced ahead to a post-lockdown high of 81.6 on 13 September, which Nomura believes is on account of increasing retail and recreation mobility, a higher driving mobility index and higher power demand.
“The continued acceleration in business resumption in August and September occurred alongside an unabated rise in infections, both quantitatively and geographically. The durability of the recovery remains in question, as rising cases may lead to the re-imposition of localised lockdowns or create more risk-averse consumers, despite current levels of lockdown fatigue,” wrote Sonal Varma, managing director and chief India economist at Nomura in a September 14 co-authored report with Aurodeep Nandi.