Coronavirus puts spotlight on looming fiscal deficit

To meet the revised estimates for 2019-20, the central government will have to garner Rs 5.03 trillion in total revenues in March, which has seen the worst phase of the coronavirus pandemic so far and the resultant lockdown. 

IMAGE: Finance Minister Nirmala Sitharaman. Photograph: Shahbaz Khan/PTI Photo

The Centre’s fiscal deficit for April-February came in at Rs 10.36 trillion or 135.2 per cent of the full year’s Revised Estimates (RE), compared with 134.2 per cent for the same period last year. This was primarily on the back of higher expenditure and lower capital receipts. 

The data released by the Controller General of Accounts on Tuesday shows that to meet the RE for 2019-20, the central government will have to garner Rs 5.03 trillion in total revenues in March.  The month has seen the worst phase of the coronavirus pandemic so far, and the resultant lockdown. 

Unless a highly-unlikely scenario of a massive expenditure cut plays out, the Centre is set to miss the revised fiscal deficit target of 3.8 per cent of gross domestic product (GDP) for 2019-20. 

Already, the finance ministry ended the year’s disinvestment with proceeds of Rs 50,298.6 crore, a shortfall of Rs 14,701 crore compared with the revised estimates of Rs 65,000 crore. 

Meanwhile, the income tax department is likely to see a shortfall of about Rs 1.5 trillion in direct taxes for the year, the highest in two decades. 

“Further slippage in fiscal deficit ratio cannot be ruled out as fiscal deficit will be higher and GDP (the denominator) will be lower due to the lower GDP growth in Q4. Depending on how the government manages the expenditure, there could be another 0.5 per cent slippage in fiscal deficit ratio,” said Madan Sabnavis, chief economist with Care Ratings. 

A 0.5 per cent slippage would take the FY20 fiscal deficit to 4.3 per cent of GDP. 

Sabnavis said on account of the outbreak, there has already been one fiscal stimulus package of Rs 1.7 trillion and additional fiscal stimulus measures can be expected. 

“A few factors would help restrain size of the fiscal deficit in March 2020, including the sharp decline in the amount of central tax devolution to be provided to states (at an estimated Rs 953 billion in March 2020 from Rs 1.6 trillion in March 2019), the enhancement of duties on petrol and diesel announced in the middle of the month, and a likely write back in food subsidy,” said Aditi Nayar, principal economist, ICRA. She added that further savings in expenditure are likely. 

“In our view, meaningfulness of the revenue and expenditure growth assumptions made in the Union and various state budgets for FY21 has drastically reduced following rapid escalation of the current crisis,” said Nayar, looking ahead. 

Nayar said the loss of economic activity is expected to dampen tax collections in April-June, and expenditure may rise sharply. 

This is especially if additional stimulus programmes are provided to dull the impact of the ongoing crisis on livelihoods and economic activity.