Fiscal math of the imponderables

Context: Due to the pandemic and subsequent lockdown, the fiscal deficit slippage is dependent of government policies and growth dynamics.

Impact of COVID:

• Rise in fiscal deficit: Although the Budget 20-21 projected a lower deficit of 3.5%, increase in borrowings of about 54% might raise it to 5.3% of GDP.
• Decline in growth : All fiscal deficit measurements are based on constant nominal growth assumptions. If the growth declines, the deficit too would widen.
• Fall in consumption: Due to lockdown, fall in oil usage has dwindled state revenues.

Remaining concerns: 

• Low spending: Actual govt. spending being just 1% of the total package of Rs 20 trillion. 

• The remaining is covered by RBI’s liquidity, refinancing measures, borrowing by state governments, and funding by state-owned enterprises.

• Neutralizing the outgo: 89% of the remaining spending is already financed by two decisions by government: Suspension of payment of dearness allowance and increase in additional excise duty and cess on petrol.
• Future uncertainty: There are apprehensions over govt.’s ability to keep the revenue shortfall and burden of extra expenditure.

Conclusion:

• The extent of the fiscal slippage could be bigger in uncertain scenarios and will be principally determined by seriousness of growth shock.