You are here: Home » PTI Stories » National » News
Business Standard

Fiscal deficit of Centre and states likely to be at 12 pc of GDP: DBS

Business Finance

Press Trust of India  |  Mumbai 

The combined fiscal deficit of the Centre and states will top 12 per cent of the GDP because of the recent economy boosting measures, and higher borrowings by States to meet COVID-19 exigencies, says a report.

According to the report by DBS Bank, the combined fiscal gap will increase by 480 basis point (bps).

In the case of the Centre, the fiscal gap will increase by 200 bps as earlier this month it hiked market borrowings by a whopping Rs 4.2 lakh crore or 54 per cent over the budget estimate to Rs 12 lakh crore, citing the pandemic. Another 80 bps increase will be on account of the fiscal boost.

In the case of states, the fiscal gap will rise by 200 bps after the Centre hiked the borrowing limit of states to 5 per cent of GSDP on Sunday.

While the government claims it is pump-priming the pandemic stricken economy by a whopping Rs 20.9 lakh crore (10 per cent of the GDP) package, in actual fiscal outgoes, this converts onlyinto a paltry 0.8 per cent of GDP, even though it has hiked the borrowing by a whopping Rs 4.2 lakh crore.

On Sunday, the Centre also allowed states to borrow 2 per cent more of their GSDP with strict reform conditions. Earlier, they were allowed to borrow 3 per cent.

In all, from the total Rs 20.9 lakh package, the immediate fiscal slippage for the Centre will be a modest 0.8 per cent of the GDP, DBS economist Radhika Rao said in a note on Monday.

Considering all the fiscal packages announced till now,the cumulative fiscal slippage is likely to be around 7 per cent of GDP, which is in line with our expectations as the Centre had last week hiked the borrowings by 2 per cent," she said.

States' increased borrowing limit and other factors will potentially take "the overall borrowings to 12 per cent of GDP, she added.

The higher borrowing by states, which are actually spending much more than the Centreon COVID-19 control and management, will involve relaxing the Fiscal Responsibility and Budget Management Act (FRBM) guidelines. This 2 per cent more borrowing will increase their debt issuance by Rs 4.3 lakh crore.

However, this is tied to strict milestones in four key areas --adoption of 'One Nation One Ration Card', reforms of local urban bodies, reforms on power sector distribution companies and ease of doing business.

Accordingly, the first 0.5 per cent increase (to 3.5 percent) is unconditional, but the next 1 per cent jump will be in four phases, linked to the above reforms being rolled out and if the targets are met in three of the four reforms, the last 0.5 per cent increase kicks in.

Of the Rs 20.9 lakh crore package, as much as Rs 8.1 lakh crore is additional liquidity offered by the RBI since February, and Rs 11 lakh crore or 5.2 per cent of GDP includes credit guarantees worth Rs 3 lakh crore which are outlays that don't add to the fiscal deficit but are reflected in contingent liabilities and thereby in overall debt.

Lastly, push towards reforms will also not involve near-term disbursements, thus carrying minimal financial impact. In all, the immediate fiscal slippage from these measures will be at 0.8 per cent of GDP.

Bulk of the near-term relief is directed at easing credit unavailability for non-banks and MSMEs, whilst also supporting vulnerable sections, including migrant labourers and street vendors etc.

Further policy support, as and when deemed necessary, is likely to carry an emphasis on financial sector health, including a capital backstop for banks, DBS noted.

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

First Published: Mon, May 18 2020. 16:26 IST