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HomeEconomyIndia’s budget is under strain on first day of new financial year

India’s budget is under strain on first day of new financial year

As India conducts world’s biggest lockdown, budget pressures will worsen on the back of a prolonged slowdown and depressed tax collections.

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New Delhi: India kicks off its fiscal year with revenues under severe strain.

A prolonged slowdown in the economy depressed tax collections in the financial year that ended Tuesday, latest official data show. As India now conducts the world’s biggest lockdown, budget pressures are set to worsen.

Finance Minister Nirmala Sitharaman has already outlined a virus relief package of 1.7 trillion rupees ($22.5 billion) and may be planning more support. That could push up the government’s fiscal deficit target to as high as 6.2% of gross domestic product in the current year, according to Fitch Solutions, compared with the government’s target of 3.5%. Others, like DBS Group and Nirmal Bang Institutional Equities Pvt., see a deficit of 4.5%.

“All the budget maths will go haywire,” said Kunal Kundu, economist with Societe Generale GSC Pvt. in Bengaluru. “There will surely have to be some restructuring in expenditure profile and the fiscal deficit would indeed have to rise, not just because of higher expenditure but also because of weaker growth.”

Even before the virus, Asia’s third-largest economy was on track for its weakest expansion in more than a decade of 5% in the fiscal year that just ended.

With Prime Minister Narendra Modi imposing a three-week lockdown on India’s 1.3 billion people from March 25 to contain the spread of the virus, non-essential consumption and production in the economy is now at a standstill.


Also read: Indian economy faces bigger risk from coronavirus because it is informal


Revenue Sources

The government had expected to fund its 30 trillion-rupee spending plan in the new fiscal year from the following sources: 20 trillion rupees from taxes, fees and dividends; 2.1 trillion rupees from asset sales; and the remaining 7.8 trillion rupees from market borrowings.

But official data released Tuesday show it’s falling far behind on its tax targets. Net tax revenue in the 11 months of the last fiscal year was 74.1% of the budgeted estimate, according to figures from the Controller General of Accounts. To meet its full-year target, the government would need to have collected 3.9 trillion rupees in taxes in March.

Revenue from asset sales also look unlikely.

The government had hoped to raise a record amount by selling national icons such as flag carrier Air India Ltd., refiner Bharat Petroleum Corp. and listing Life Insurance Corp. of India on the stock exchange. It’s now facing record losses in aviation, plunging oil prices, and the worst quarterly drop in local stocks since 1992, making an IPO difficult.

Borrowing Plans

“Don’t even think of putting anything on the table for the next six months,” Madan Sabnavis, chief economist with Care Ratings Ltd., said by phone from Mumbai. “Aviation has come to a standstill. The oil industry is in deep trouble. Air India and BPCL don’t look attractive.”

The government on Tuesday kept its borrowing target for the year at 7.8 trillion rupees, while proposing to raise 63% of that amount in the first six months of the year.

“The government is committed to meet its requirements for fighting Covid-19 whether on account of health issues or on account of protecting the economy, and also providing the necessary stimulus at any point of time,” said Economic Affairs Secretary Atanu Chakraborty. “The entire borrowing plan has been designed in that fashion.”

On the monetary policy side, the central bank has cut interest rates and injected $50 billion liquidity into banks to expand credit to soften the virus’s blow. The government also draws some of its revenue from the Reserve Bank of India in the form of dividends.

“The government will inevitably have to come out with additional packages,” said Teresa John, an economist at Nirmal Bang Institutional Equities Pvt. in Mumbai. “It may have to resort to higher borrowing and take out higher dividends from RBI, if possible.” –Bloomberg 


Also read: Modi’s poorly planned lockdown won’t save us from coronavirus, but will kill economy


 

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2 COMMENTS

  1. Any country that provides 4 National holidays in one month (2,6, 10, 14) is unlikely to show much progress with its economy. Add week ends and it is almost half a month of economic shut down!!

  2. Not meant to sound alarmist but the economic team should keep a hawk’s eye on India’s sovereign rating. With the kind of dismal growth that has been taking place pre Covid 19, foreign investors were turning sceptical. In March, they have fled. The global economy is dealing with a crisis worse than 2008. Not supportive of India. Unless the government draws up a sensible reforms agenda, the economy will settle into an even deeper trough.

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