Aditi Nayar, Principal Economist, ICRA Ltd on Fiscal Deficit said, “With a double-digit rise in expenditure amid the ongoing revenue shock, the Government of India's fiscal deficit has expanded by a sharp 53.3% on a YoY basis in Q1 FY2021, and now stands at 83% of the budget estimate for this fiscal, reinforcing the challenges posed by the ongoing crisis to fiscal management.:
The GoI's gross tax revenues have thrown up some interesting trends. Firstly, the pace of contraction in the gross tax revenues has narrowed to 23% in the month of June 2020 from the dismaying level of 41% seen at the end of the previous month, in line with our assessment of some recovery in economic activity during the unlock phase.
Secondly, by the end of the first quarter of FY2021, the gap between the performance of indirect and direct taxes has narrowed sharply, to a similar contraction of 34% and 31%, respectively, as per our estimates. Thus the shock to consumption, which had first shown up in the deep de-growth in indirect taxes in April-May 2020, has eased in June 2020, in line with the recovery in sales. However, the impact of the aforesaid shock on corporate profitability has manifested itself with a lag, with a contraction of 46% in corporation tax in the month of advance tax collections.
The GoI's spending has recorded a volatile trend on a monthly basis in Q1 FY2021, with a growth of 21% in April 2020, followed by a similar contraction of 21% in May 2020, and a sharp expansion of 46% in June 2020. During Q1 FY2021, while revenue expenditure has recorded a moderate rise of 10.5%, capital spending has expanded by a sharp 40%, helped by the low base of Q1 FY2020 related to the ongoing Parliamentary elections.
Notably, subsidy release in Q1 FY2021 is around half of the year-ago level, which has prevented the fiscal deficit from recording an even sharper rise.
ICRA expects the net tax revenues of the Centre, non tax revenues and disinvestment proceeds to together trail the budgeted level by more than Rs. 6.0 trillion, highlighting the extent of the revenue shock being faced by the Government. Taking into account the fiscal support announced by the Government under the “Aatma Nirbhar Bharat Abhiyan” and the expenditure management measures that have been put in place, which could result in moderate compression in expenditure, our baseline estimate is that the GoI's fiscal deficit will surge to Rs 13.0 trillion in FY2021 from the budgeted level of Rs. 8.0 trillion. This anticipated fiscal slippage, even in our base case scenario, exceeds the extent by which the Centre’s market borrowings have already been increased.