Interview | India FY21 fiscal deficit expected to be around 7.4% of GDP: ICRA economist Aditi Nayar

Edited excerpts:

What's your assessment of the LTC scheme and the festival bonuses announced? Do you think it will be able to boost demand and to what extent? We anticipate that the LTC and festival advance schemes will result in a temporary boost to consumer sentiment and economic activity. A section of the eligible employees may opt for this scheme, which would result in a sharper pick up in festive season sales.

However, this would only end up upfronting consumption, and the temporary uptick would subsequently fizzle out in our view.

Where do you see India's fiscal deficit to be in FY 2020-21? The pandemic, lockdowns and various restrictions have severely tested the meaningfulness of budgets that were made for FY2021 before the crisis erupted. We estimate the revenue shock to the Government of India at Rs 6 lakh crore, relative to the level of receipts that had been budgeted for this discal.

Higher expenditure on the announced fiscal support measures, first supplementary demand for grants etc. would be partly offset by the expenditure management measures that have been put in place. In our assessment, the Covid-19 pandemic is expected to result in a sharp increase in the GoI’s fiscal deficit to Rs 14 lakh crore in FY 2021 from the budgeted level of Rs 8 lakh crore. Assuming a nominal GDP contraction of 7.5 percent, this works out to a fiscal deficit of 7.4 percent of GDP for FY 2021.

For the state governments, the size of financing available through various types of borrowings would broadly dictate the extent of their fiscal deficit this year. Option 1 for borrowings put forth by the Centre suggests that 4-5 percent of GSDP (gross state domestic product) would be available through net market borrowings, and an additional Rs 1.22 lakh crore would be provided through loans from the Centre, which works out to another 0.65 percent of GSDP.

Our baseline expectation is that the general government (centre plus states) fiscal deficit is likely to be around 12.3 percent of GDP in FY 2021.

With the increased borrowing by the Centre and states, is there a concern over a fiscal crisis? The pandemic has created an unprecedented revenue shock, which is necessitating higher government borrowings. In the absence of the latter, expenditure curtailment could have led to an even more severe collapse in economic activity.

Of course, the higher borrowings being undertaken in FY2021 will need to be serviced going forward. Therefore, there is merit in expanding borrowings judiciously, to a level that does not create an excessive strain on debt affordability and serviceability in the future years.

Do you think there is a case for even more borrowing by the centre and direct monetization by RBI? There are certainly some areas on which additional expenditure may be prudent at this juncture, which may necessitate further borrowings if revenues don’t revive or other expenditure savings can’t be found. For instance, extending the free foodgrains scheme till the end of this fiscal year, to lessen the hardship being experienced by some sections of society.

Clearance of pending dues by various levels of government would ease cashflows of the private sector. Moreover, a focus on expediting capital spending, which has a high multiplier effect, would spur a pickup in economic activity and improve sentiment. For instance, the creation of new infrastructure or upgrade of existing one, where the basic plans and approvals are already in place, could be accelerated.

However, we remain concerned that the total financing envelope that is presently available for the state governments, may be inadequate to prevent several of them from having to incur a substantial cut in capital spending.

The Covid pandemic has obviously reset all previous fiscal and growth calculations. While it is still a developing situation, do you think it is time to completely scrap the 3 percent FRBM target which hasn't even been met in the best of the times. What should be a realistic fiscal target over the medium to long term? Is there a case for a fiscal deficit range? For India, a fiscal deficit of 3 percent of GDP has been elusive. In any case, it may be neither achievable in a sustained manner and nor desirable, as the only way to get there may be to endlessly postpone capex.

It may be time to bring back a focus on the revenue deficit, with a target to potentially pare it to 2 percent of GDP over the next four-five years. Assuming that over time, capital spending net of disinvestment, stabilises at 2 percent of GDP, this would mean a fiscal deficit of 4 percent of GDP over the medium term.