India’s fiscal deficit may shoot up to 6.2 pc due to economic package

“At Fitch Solutions, we are revising our forecast for India’s FY 2020-21 (April-March) central government fiscal deficit to widen to 6.2 percent of GDP, from 3.8 percent of GDP previously (estimated by Fitch Solutions), which reflects our view that the government will miss its initial target of 3.5 per cent by a wider margin,” the agency said.

Underpinning the revised forecast are weaker revenue collection as a result of a sharp virus-driven downturn in economic activity and higher expenditures aimed at softening COVID-19’s economic shock.
Stating that weak economic activity will likely see revenue collection contract in 2020-21, Fitch Solutions said receipts may contract by one percent from a growth of 11.8 percent previously.

“We have revised our FY 2020-21 real GDP growth forecast to 4.6 percent, from 5.4 percent previously, to reflect our view for growth to weaken further from our estimate of 4.9 percent in FY 2019-20 due to both economic disruptions due to domestic movement restrictions and weak global demand,” it said.

The government declared a 21-day nationwide lockdown beginning March 25.
The rushed implementation of the lockdown, which gave its citizens only a few hours to prepare has reportedly caused many rural migrants in the cities to be left without food and shelter, prompting them to return to their villages, either on the last remaining carriers or on foot.
The mass migration of such workers raises a significant risk of a larger coronavirus outbreak across the country, it said, adding the rural areas reportedly have fewer coronavirus cases versus the cities as of end-March, and the perceived safety of the rural areas has given another reason for the migrant workers to return home.

“As such, we see virus-led economic disruptions extending for several quarters, which will weigh heavily on personal and corporate income tax collections for the year,” it said.

At the same time, expenditures are expected to surge as the government responds to the coronavirus crisis, both on an economic and social front over 2020-21.
“We forecast expenditures to rise by 22.2 percent despite lower revenue collection,” it said. “Faced with a humanitarian crisis brought about by the COVID-19 pandemic, we believe that the central government will have no choice but to increase their spending, over and above what they have planned for in 2020-21 Union Budget and the Rs 1.7 lakh crore (0.8 percent of GDP) fiscal stimulus package it released on March 26.”
The package included cash handouts, free food for the poor, medical insurance for medical staff, and a temporary regulatory amendment for employees of small companies to dip into their pension fund to fund their expenditures in the meantime.

Fitch Solutions added that the Rs 1.7 lakh crore fiscal stimulus is “inadequate to provide support the economy of India’s size amid a likely global recession“.

“In contrast, countries such as Singapore and the US have already announced stimulus packages worth 11 percent and 10 percent of GDP, respectively, and still are prepared to do more if necessary,” it said.