India Ratings expect Centre’s fiscal deficit to shoot up to 7.6% in FY21; twice budget target

The government's fiscal deficit is estimated to touch 7.6 percent in FY21, more than double the Budget Estimate, as the nation spends extra to lessen the impact of the COVID-19 pandemic while facing a shortfall in incomes, as per a report.

India Ratings and Research stated in a report that at the consolidated level, the fiscal deficit of the Centre and states will collectively come at 12.1 percent, with states contributing 4.5 percent.

The rating agency also said the government has already announced a stimulus package damaging the fiscal math by 1.1 percent.

There is a demand coming for a second package.

Economic activities have slowed down as a result of long lockdown caused by the COVID-19 pandemic.

India's gross domestic product (GDP) will shrink by 5.3 percent, while states like Assam, Goa, Gujarat and Sikkim are expected to witness a double-digit contraction, the rating agency said.

With the growth and revenues going down, the obvious impact will be on the fiscal deficit, which is considered an important macroeconomic health indicator.

"The aggregate central and state fiscal deficit in FY21 will increase to 12.1 percent of GDP (Centre: 7.6 percent, states: 4.5 percent), mainly due to the expected shortfall in revenue collections rather than increased expenditure," it said.

India Ratings and Research Chief Economist D K Pant said the pandemic hit at a time when the Indian economy was already experiencing a slowdown due to weakness in consumption demand. "It has severely disrupted the supply side, as production and sale were allowed only in the areas classified as 'essential' during the lockdown."

He said the states receiving significant remittances — India is the biggest receiver of such fund transfer by any country's diaspora — will be impacted because return and/or repatriation of expatriates to India has its own consequences for the Indian economy.

The growth slowdown will have a significant impact on the asset quality of the financial sector, and both banks and non-banks would require more capital to continue lending, it said.