Q1 FY21 GDP | Budget estimates and projections need a relook as economy contracts

Though businesses and economic activity have started picking up since then, India's economy still doesn't seem to be out of the woods.

India will be officially in recession if GDP contracts in the current quarter —July-September — too, which most experts reckon would take place.

Recession is defined as a period when economic activities contract for two quarters in a row (or six months). It occurs when there is a contraction in business cycle, caused by shrinking economic activity and followed by a consequent decline in spending.

The contraction in GDP growth would now call for major revisions in budget estimates. In Budget 2020-21, the government has pegged gross tax revenues at Rs 24.23 lakh crore, a 12 percent increase from Rs 21.63 lakh crore in the previous fiscal. As reported earlier by Moneycontrol, the finance ministry's internal estimate pegs revenue contraction for FY21 at around 8 percent, due to the clampdown on economic activity.

A decline in estimated revenue projection, however, is not expected to hit the government's expenditure plans, as it has already ramped up its borrowing programme and may consider increasing it further in the second half of this fiscal.

As private expenditure is expected to be majorly impacted due to the uncertain nature of the COVID-19 and a general appetite for risk aversion by banks, impacting credit availability, it's the government that is expected to up its public spending to revive the economy.

Due to the pandemic, the projected government expenditure would shoot up significantly from budgeted levels.

Sub-optimal economic activity, despite lifting of the lockdown, would mean that the government might have to spend more to revive the economy, over and above the already committed additional expenditure of Rs 2.5-3 lakh crore under Garib Kalyan and Atmanirbhar Bharat announcements.

The government has announced it will increase its market borrowings for FY21 by Rs 4.2 lakh crore.

Economists and experts have been pegging that the fiscal deficit in FY21 could touch as high as 7 percent of GDP. In 1990-91, the fiscal deficit reached the 7-percent mark when India was going through a Balance of Payment crisis.

In the April-June quarter, tax revenue fell Rs 1.3 lakh crore from 2.5 lakh crore in the year-ago period. The revenue shortfall widened the fiscal deficit at the end of June to Rs 6.62 lakh crore, or 83.2 percent of the full-year budget estimate of Rs 7.96 lakh crore, and it is expected to widen further due to the coronavirus-related disruptions.