Let Fiscal Deficit Slip; Focus on Growth

There is never a good time for any country to be suffering a pandemic, however the current Covid-19 pandemic could not have come at a worse time for the Indian Economy. Even as the Government was trying to navigate the economy through a period of slowdown in economic growth, credit squeeze in the banking system, low private industry capex, the Covid-19 has ensured that the economy will not have any leg to stand , as even the Government Capex may face headwinds during fiscal 2021.

For past few years, the growth in the Indian economy has been driven by strong private consumption and Public (Central and State) Capital Expenditure. The capex by private sector has remain muted over the last few years. Therefore, the higher Government capex was very critical to kick-start growth in the Indian economy. Therefore, in Union Budget 2020-21, the Government allocated INR 4.12 Lakh Crore, an 18% on-year increase towards Capital Expenditure.

However, with Covid-19 Pandemic, the revenue expenditure will not be able to achieve its target. The Government had estimated revenue receipt of INR 22.5 lakh Crore in Union Budget 2020-21. One of the major enabler for achieving the target was meeting its steep divestment target of INR 2.1 lakh crore through stake sale in Life Insurance Corporation, IDBI Bank, Air India, BPCL, Container Corporation of India, etc. Under the current economic environment, it is unlikely the Government will be able to achieve even 50% of the target windfall from stake sale.

Estimated growth in Revenue Receipts from different segments in fiscal 2021

Note: The size of the bubble indicates the share of the receipt as % of overall revenue receipt

Source: Budget Documents

As illustrated above, though the revenue growth estimates by the Government were fairly modest (except Disinvestment target), we are unlikely to achieve this target. The drop in crude oil price has enabled the Government to increase excise duties on petrol and diesel. In March 2020, the Government increased its overall excise duty on petrol and diesel by ~15% and ~18% respectively. However, demand destruction during Q1 fiscal 2021 will impact the overall collections and offset some of the potential gains. The estimated revenue for fiscal 2021 from excise on petrol and diesel was INR 1.7 lakh crore (excluding basic excise duty), or 7.5% of overall revenue receipt

Assuming a flat growth in Union Excise Duty estimates, a 5% miss on other estimates, and INR 75,000 crore miss on disinvestment side, the revenue receipt for the year would be around INR 20-20.25 lakh crore, as compared to current estimate of INR 22.4 lakh crore.

On the expenditure side, the Government has its task further cut out. With economy currently at a complete halt, the Government will have to provide substantial stimulus to get the Elephant back on its feet. In Union Budget 2020-21, the Government had estimated its expenditure at INR 30.4 lakh crore, including INR 4.12 lakh crore of capital expenditure. Due to the impact of Covid-19, the Government has already announced a stimulus of INR 1.7 lakh crore focused on low income group. The Government is likely to carry out a second round of stimulus to support India Inc. Further, the drop in crude oil prices may help the Government to reduce its bill on cooking fuel subsidy by around INR 40,000 Crore (assuming $30 drop in crude oil price than budgeted crude oil estimate).

Therefore, the total Government expenditure will depend on what path the Government chooses, fiscal prudence or pushing growth through whatever measure it takes.

Fiscal Deficit under different scenarios

Source: Budget Documents, Economic Survey

The Government has been able to rein in the fiscal deficit from high of 4.9% in fiscal 2013 to 3.3% in fiscal 2020. However, the public capex has been also stagnant in the range of 16%-1.8% (as % of GDP) which does not bode well to get the growth engine rolling.

Trend in Fiscal Deficit and Public Capex

Source: Budget Documents, Economic Survey

Going forward, if the Government wants to meet its fiscal deficit target of 3.5% for fiscal 2021, it will have to cut down on its allocation to Gross Budgetary Support of INR 4 Lakh Crore. However, given the fact that the country will come out of a complete economy stall post Covid-19, the Government will have to loosen its purse strings and front load all the planned budgeted expenditure. Also, the high debt levels of NHAI and slacking returns on new capital employed for Indian Railways even before the pandemic-forced slowdown will lead to requirement of further fund infusion by the ex-chequer. On the other hand, the Government had assumed INR 6.7 lakh crore of capex through IEBR (Internal and External Budgetary Resources) which will also face headwind due to dampening internal cash accruals of CPSEs. Therefore, the Government perhaps has absolutely no space to exercise fiscal prudence. Apart from the above, higher infra spending, infusion of liquidity into private bank/NBFCs through an SPV in quasi-equity mode, removal of tax on buyback & LTCG are also some of the reforms that the Government will have to undertake to spur growth in the economy

When the world is dealing with a crisis of such proportion, no rating agency or any global bank will view the higher fiscal deficit negatively. The developed economies such as the US, UK and Italy have already announced their mega stimulus plans. Though our fundamentals are completely different, this is an opportunity for the Government to go all guns blazing post things stabilise on the healthcare (Covid-19) front. The global financial watchdogs won’t mind India’s fiscal deficit for current fiscal, for everybody will be gunning for growth. India did not let crisis of 1991 go waste, hope the Government again creates an opportunity out of a crisis.