With the emergence of Covid-19, the global economy has gone out of control. Its impact on people’s lives is drastic. The crash in markets has left businesses bankrupt and people unemployed. It has also affected one of the major macro-economic indicators: the fiscal deficit.
The fiscal deficit is the difference in the total revenue and total expenditure of the government. It indicates the total borrowing needed by the government and determines the creditworthiness of a country. It is also an important policy tool to revive an economy from recession or depression and to create jobs.
India’s fiscal deficit is also a victim of the virus. The current situation has left economists wondering about the country being able to meet its estimated target. According to the information Reuters received from two sources, India is likely to miss its fiscal deficit target of 3.3 per cent of Gross Domestic Product (GDP) for the current financial year by 30 -50 basis points, the main reason being the sharp slowdown in the economy that has severely crimped tax collection goals. India’s economy grew at its weakest pace since 2013 between April and June as consumer demand and government spending slowed and global trade frictions.
Finance Minister Nirmala Sitharaman, in her Budget 2020 speech proposed reducing fiscal deficit by 30 basis points to 3.5 per cent of GDP in 2020-21. She invoked the escape clause to take a 50 basis points leeway in the fiscal deficit number for 2019-20, taking the revised estimate to 3.8 per cent of the GDP.
“While the latest budget targets a narrower deficit, prolonged weakness in nominal GDP growth in India, combined with lower revenue collections, has dampened the outlook for fiscal consolidation, raising the risk that the debt burden may not stabilize,” said Gene Fang, Moody’s associate managing director. “The debt burden is sensitive to nominal GDP growth, which we expect will remain lower on average than in the past. In the light of India’s weak fiscal health compared with its rating peers, any slippage in debt reduction will be credit negative,” Fang added.
Officials believe that the government will miss its fiscal deficit target. Is it true? Well, we are yet to find out.
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