The fiscal outcome for the financial year 2020 seems much weaker than what the Central government estimated in February 2020. The fiscal deficit has increased to ₹9.4 trillion, or 4.6%of GDP according to the provisional actual for this financial year. Earlier the Revised Estimate (RE) was that of ₹7.7 trillion, or 3.8%of GDP. But the spread of COVID-19 and the reported steps to minimise its effect have blurred the outlook for FY21 government finances.
The fiscal year 2020-21 has begun poorly. News reports indicate that direct tax collections of the Centre contracted by about 25% broadly in line with the GDP forecast for the first quarter (Q1) of FY20. While the economic outlook remains uncertain, the worst is to be seen in the first quarter of FY 21.
Based on the anticipated compression in non-discretionary consumption and income levels following the pandemic, ICRA forecasts the gross tax revenues of the Centre at ₹16.9 trillion, 30% lower than the Budget Estimates (BE) for FY21, and 15.7% lower than the provisional actuals for FY20. State governments would bear a substantial portion of this shortfall through lower tax devolution to them.
On a positive note, ICRA forecasts the gain to the Central government from the recent excise duty hikes on petrol and diesel at around ₹1 trillion above the FY21 budget estimates. Building this in, and adjusting for the higher-than-warranted tax devolution to the States in FY20, ICRA still expects the net tax revenues of the Centre to fall short of the budgeted level by ₹3.9 trillion.
The financial support under the ‘Atma Nirbhar Bharat Abhiyan’ is estimated at a modest one per cent of GDP. The previously enhanced outlay for MGNREGA and the newly launched Prime Minister Garib Kalyan Rojgar Abhiyan would refocus the spending of the government on rural areas that have received large numbers of returning migrants.
The report concludes that the government may face a fund shortage to fulfil the budgeted expenditure. This could cause a massive cut in capital expenditure as well as centrally sponsored schemes.
*ICRA-Indian independent and professional investment information and credit Rating Agency