Assessment of FY21 fiscal deficit
The central government had announced a borrowing target of INR12 lakh crore on 8 May 2020. If the government insists on adhering to this target for FY21, it would amount to 6.3% of the estimated FY21 nominal GDP at INR190.5 lakh crore. However, given the revenue trends, this level of fiscal deficit would involve a contraction in government expenditures. In the first seven months of FY21, center’s gross tax revenues have contracted by (-)16.8%. Center’s non-tax revenues also showed a contraction of (-)48.2% during this period. Even with some improvement in direct tax revenues in the remaining months of FY21, we assess that there would be a contraction of about (-)14.5% in center’s gross tax revenues for the full year. Non-tax revenues and non-debt capital receipts may also continue to languish well-below the FY21 budget estimates. At these levels, considering a fiscal deficit of 6.3% of GDP for the full year, there would still be an expenditure contraction of (-)15.5% as compared to budgeted FY21 expenditure level. With an enhancement of fiscal deficit of say, up to 6.9% of estimated GDP, this expenditure contraction would be moderated to (-)11.7%. This will finance an expenditure of INR26.9 lakh crore, which is exactly equal to the actual expenditure in FY20. This may serve as a benchmark to consider the contours of Union Budget 2021 (FY22).
Prospects of Union Budget 2021: divergence between expenditure needs and revenues
The mainstay of the union government budget consists of centre’s gross tax revenues. The Ministry of Finance (MoF) has to assess the base magnitude in FY21 and the growth rate that can be applied on it in order to project centre’s gross tax revenues for FY22. There was a contraction in centre’s gross tax revenues even before the Covid shock hit the Indian economy. In FY20, centre’s gross tax revenues fell by (-)3.4%. As discussed above, in FY21, the contraction is expected to be sharper. This implies that in absolute numbers, the base figure for gross tax revenues estimated at INR17.2 lakh crore in FY21 would be well-below the actual gross tax revenues of INR20.1 lakh crore in FY20. In fact, centre’s gross tax revenues were at INR17.2 lakh crore in FY17. Given the structural changes in GST and CIT in recent years, nominal tax revenue growth rate may be expected to be less than the nominal GDP growth rate. The expected buoyancy of centre’s gross tax revenues in FY22 may be similar to that in FY19 at 0.8. In fact, in FY20, it had become (-)0.5. The IMF has projected India’s FY22 nominal GDP growth at 12%. It would be unrealistic if the MoF considers a growth in centre’s gross tax revenues at any rate higher than 10%. Thus, centre’s gross tax revenues may be estimated for FY22 at INR18.9 lakh crores (Table 1).