More fiscal disturbance to be expected as the lockdowns are extended

Excise collections in the first two months were lower than last year by around Rs 17,000 crore.
The PM has announced an extension for the PM Garib Kalyan Anna Yojana till November, which was quite expected. The scheme was originally announced in March for three months and would have lapsed in June. Given that the pandemic is still spreading and the lockdown is more or less existent in all states, it was necessary to provide relief to the targeted population. Therefore, the extension of the scheme was expected though the time frame was unknown. The PM will be covering the entire festival season till November so that 800 million will get 5 kg of cereals and one kg of pulses every month for this period. Further extensions cannot be ruled out, though the government will be carefully observing trends in the pick-up in economic activity and agriculture.

The cost of this programme has been put at Rs 90,000 crore, which is outside what was in the Budget. Therefore, there will definitely be pressure on the fiscal balances. Today it is almost clear that there will be a fall in the real GDP growth and the best-case scenario is one in which nominal GDP stagnates at around Rs 200 trillion (with real GDP growth declining by 5 per cent and inflation being 5 per cent, thus resulting in zero growth). Intuitively it can be measured that the extension of this scheme will be at 0.45 per cent of GDP and hence add to the fiscal deficit by this amount. In fact, the earlier measures were of the order of Rs 1.75 trillion and with this new addition will be Rs 2.65 trillion or 1.3 per cent of GDP.

The government has already increased its gross borrowing programme to Rs 12 trillion from Rs 7.8 trillion and it would be interesting to see if these numbers were included in the calculation. The government accounts for the first two months of the year are not encouraging and tax revenue aggregated to Rs 1.26 trillion compared with Rs 2.14 trillion last year. The shutdown has resulted in sharp decline of GST collections of around Rs 57,000 crore and income tax by Rs 25,000 crore. These shortfalls will persist as long as the lockdowns are extended. This has to be kept in mind throughout the year as revenue shortfalls will be linked with level of economic activity. It is probably keeping this in mind that the government has been increasing the excise duty on petrol and fuel to shore up its resources. Excise collections in the first two months were lower than last year by around Rs 17,000 crore.

The overall fiscal deficit will most likely move towards the 7-8 per cent range for sure for the central government this year and a lot will be dependent on the disinvestment programme which is betting on three big-ticket sales – LIC, BPCL, Air India. However, the positive aspect of this enlarged fiscal deficit which is combined with the state deficits and can come closer to 12 per cent, is that the surplus liquidity in the system will buffer to a large extent this demand and ensure smooth passage. Also, the RBI can be relied on to provide liquidity through its OMOs and LTROs to ensure there is minimal market distortions.

The challenge for the government evidently will be next year as it has to work hard to revert to the FRBM path.



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