India's fiscal deficit may shoot to 6.2% of GDP in FY21: Fitch Solutions

India's fiscal deficit in 2020-21 may shoot up to 6.2 per cent of the GDP from 3.5 per cent government estimate as a fallout of the Covid-19 economic stimulus package, Fitch Solutions said on Wednesday.

With businesses disrupted due to the lockdown and its ripple effects, revenue will come under "heavy pressure" and may force the government to look towards additional borrowing and/or a higher central bank dividend to fund its expenditure, it said.

"At Fitch Solutions, we are revising our forecast for India's FY2020/21 (AprilMarch) central government fiscal deficit to widen to 6.2 per cent of GDP, from 3.8 per cent of GDP previously (estimated by Fitch Solutions), which reflects our view that the government will miss its initial target of 3.5 per cent by a wider margin," the agency said.

Underpinning the revised forecast are weaker revenue collection as a result of a sharp virus-driven downturn in economic activity and higher expenditures aimed at softening Covid-19's economic shock.

Stating that weak economic activity will likely see revenue collection contract in 2020-21, Fitch Solutions said receipts may contract by 1 per cent from a growth of 11.8 per cent previously.

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"We have revised our FY2020/21 real GDP growth forecast to 4.6 per cent, from 5.4 per cent previously, to reflect our view for growth to weaken further from our estimate of 4.9 per cent in FY2019/20 due to both economic disruptions due to domestic movement restrictions and weak global demand," it said.

The government declared a 21-day nationwide lockdown beginning March 25. "The rushed implementation of the lockdown which gave its citizens only a few hours to prepare has reportedly caused many rural migrants in the cities to be left without food and shelter, prompting them to return to their villages, either on the last remaining carriers or on foot."

The mass migration of such workers raises a significant risk of a larger Covid-19 outbreak across the country, it said, adding the rural areas reportedly have fewer coronavirus cases versus the cities as of end-March and the perceived safety of the rural areas has given another reason for the migrant workers to return home.

"As such, we see virus-led economic disruptions extending for several quarters, which will weigh heavily on personal and corporate income tax collections for the year," it said.

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At the same time, expenditures are expected to surge as the government responds to the Covid-19 crisis both on an economic and social front over 2020-21.

"We forecast expenditures to rise by 22.2 per cent despite lower revenue collection," it said. "Faced with a humanitarian crisis brought about by the Covid-19 pandemic, we believe that the central government will have no choice but to increase their spending, over and above what they have planned for in 2020-21 Union Budget and the Rs 1.7 trillion (0.8 per cent of GDP) fiscal stimulus package it released on March 26."

The package included cash handouts, free food for the poor, medical insurance for medical staff, and a temporary regulatory amendment for employees of small companies to dip into their pension fund to fund their expenditures in the meantime.

Fitch Solutions said the Rs 1.7 trillion fiscal stimulus is "inadequate to provide support the economy of India's size amid a likely global recession".

"In contrast, countries such as Singapore and the US have already announced stimulus packages worth 11 per cent and 10 per cent of GDP, respectively, and still are prepared to do more if necessary," it said.

"As such, we expect additional stimulus packages to be announced by the Indian central government over the coming months, and have accordingly factored this into our deficit forecast revision.

Hurdles in fighting coronavirus are lack of funds, healthcare infra: Fitch

Continued lack of medical funds and healthcare infrastructure despite additional funding poses challenges in mounting an effective response against the coronavirus outbreak, according to a report.

"The continued lack of medical funding and healthcare infrastructure inform our view for the potential epidemic to be worse in India if it is not adequately contained. With 8.5 hospital beds per 10,000 population and 8.0 physicians per 10,000, the country's healthcare sector is not equipped for such a crisis," Fitch Solutions said.

Moreover, the significant inefficiency, dysfunctioning, and acute shortage of the healthcare delivery systems in the public sector appear to be insufficient to match up with the growing needs of the population, it said.

Fitch Solutions noted that more than 80 per cent of the population still does not have any significant health insurance coverage and approximately 68 per cent of the Indian population has limited or no access to essential medicines.

"In addition, over the last two decades, the availability of free medicines in public healthcare facilities has declined from 31.2 per centto 8.9 per cent for inpatient care and from 17.8 per cent to 5.9 per cent for outpatient care, according to a Public Health Foundation of India study," it said.

Govt may breach fiscal deficit target; need for stimulus rises: Report

The government might breach the fiscal deficit target this financial year amid drop in the revenue mobilisation and expected additional expenditure by the government, says a report.

According to Dun & Bradstreet's Economy Forecast, the need for fiscal stimulus has increased even as the government finances remain "strained".

"We expect that the drop in the revenue mobilisation of the government and likelihood of additional expenditure by the government might breach the fiscal deficit target in FY20," Dun & Bradstreet India Chief Economist Arun Singh said.

The government has set a 3.3 per cent fiscal deficit target for the current fiscal.

Singh further added that given the resources constraints, increase in fiscal deficit might lead to crowding out of private investments.

According to the report, corporate liabilities are already higher. The balance-sheets of corporates, government, banks and households remain constrained or weak and revenue collection will play an important role.

"Revenue collection will thus be important for the government to implement a fiscal stimulus. To do that, tax reforms are needed. GST should be simplified further, and direct tax collections should increase," Singh said.

As per the report, the index of industrial production is likely to remain subdued in the short to medium term amid slowdown in demand, lackluster investment and weak exports.

Moreover, optimism of India Inc remains clouded and cautiousness amongst investors have increased over the various graft and compliance related issues in the financial sector, it noted.

D&B expects Index of Industrial Production (IIP) to remain subdued by 0-1 per cent during November this year.

On the prices front, the report said food inflation is expected to remain higher, given the supply disruptions as crops have been damaged in many states, exerting upward pressure to the CPI inflation.

D&B expects the CPI inflation to remain in the range of 6.3-6.5 per cent and WPI inflation to be in the range of 2.1-2.4 per cent during December 2019, respectively.

Rate cuts fail to cheer bond market worried about Modi govt's borrowing

September is shaping up to be a brutal month for Indian bonds, and traders are hoping the government’s borrowing plans this week will offer some relief.

Benchmark 10-year rupee yields have climbed almost 20 basis points since end-August, driven by fears that a $20 billion tax cut could boost an already bloated bond supply. Even an expected interest-rate cut by the central bank on Friday -- the fifth for the year -- has done little to aid sentiment.

All eyes are now on the government’s financing plans for the fiscal second half due Monday, with traders concerned that the authorities could increase bond sales beyond the 2.68 trillion rupees ($37.8 billion) set earlier.

“The worries about the fiscal overhang are so deep that it has upset optimism created by the Reserve Bank of India’s easing,” said Mahendra Jajoo, head of fixed income at Mirae Asset Global Investments Co. in Mumbai. Tax cuts have reignited worries about the breach of deficit targets, he added.

Sentiment toward rupee debt soured after Prime Minister Narendra Modi’s administration unleashed a surprise tax break on September 20 to shore up growth. Ten-year yields jumped the most since February 2017 amid fears the authorities would be forced to sell more bonds to make up for an estimated 1.45 trillion rupees of lost revenue.

Benchmark 10-year yields may rise to 7 per cent in the coming months from around 6.7 per cent due to worries about a wider budget deficit and increased bond supply, according to Mirae Asset and IndusInd Bank Ltd. Mirae warned yields could even vault past that level if the central bank doesn’t step in to conduct open-market bond purchases.

The concerns persist even after an assurance from a government official that the borrowing plan remains unchanged for the rest of the financial year. Finance Minister Nirmala Sitharaman has also said any review of the fiscal gap target will only take place nearer to the next budget in February.

Traders remain skeptical, especially after Standard Chartered Plc estimated the government will need to borrow as much as 800 billion rupees more, and Fitch Ratings flagged the likelihood of a wider fiscal deficit.

“Sentiments have been impacted by the fear of additional supply,” said Shyamal Karmakar, head of rates and credit trading at IndusInd Bank in Mumbai.

Below are key Asian economic data and events due this week:

Monday, Sept. 30: BOJ bond purchases, China manufacturing PMI, Japan and South Korea factory output, Thailand trade balance and India budget deficit

Tuesday, Oct. 1: RBA policy review, Japan unemployment, CPIs in Indonesia, South Korea and Thailand, South Korea trade balance

Wednesday, Oct. 2: Japan monetary base, Bank of Thailand’s MPC minutes

Thursday, Oct. 3: Australia services PMI and trade balance, Japan foreign bond buying

Friday, Oct. 4: RBI rate decision, Malaysia trade balance, South Korea FX reserves, Philippines CPI

No plans to revise fiscal deficit target or cut spending now: Sitharaman

The government will not revise its fiscal deficit target immediately and is not planning any spending cuts at this stage, said Finance Minister Nirmala Sitharaman on Sunday, after slashing corporate tax rates to boost a flagging economy.

The government cut corporate tax rates on Friday in a surprise move designed to woo manufacturers, revive private investment and lift growth from a six-year low that has led to major job losses and fueled discontent in the countryside.

Though equity markets welcomed the move, bond yields spiked to a near three-month high on speculation the government may have to borrow more to meet its spending needs.

The measures will cut revenue by Rs 1.45 trillion ($20.4 billion) in the current fiscal year, according to government estimates. But Sitharaman said the government would only review the fiscal deficit target closer to the 2020/21 budget.

"At this point of time we are not revising any target. The decision will be taken later," she told reporters at her residence in New Delhi on Sunday, adding that there was no plan to cut spending currently.

Sitharaman also said the government would decide on additional market borrowings for the second half of 2019/20 later.

Ratings firm S&P Global said on Friday India's move to cut corporate tax rates was a "credit negative development" despite potentially boosting the economy as it will widen its fiscal deficit.

Government sources told Reuters this month that India is likely to miss its fiscal deficit target for the current financial year and, toward the end of 2019, be forced to raise it to 3.5% of GDP from 3.3% after economic growth fell to a six-year low of 5% in the April-June quarter.

Fiscal deficit crosses 77% of budgeted target in first four months of FY20

The Centre’s fiscal deficit touched 77.8 per cent of the Budget Estimates (BE) at Rs 5.5 trillion in the first four months of the financial year 2019-20 (FY20), against 86.5 per cent in the year-ago period.

The deficit stood at 8.8 per cent of gross domestic product (GDP) in the first quarter of FY20 (Q1FY20), an improvement over the Q1FY19 figure of 9.5 per cent.

The government managed to keep the deficit, in terms of percentage of BE, at a lower level in April-July of FY20 compared to last year largely because of its expenditure compression, mainly capital expenditure (capex). Moderation in capex in terms of percentage of BE may have an impact on the economic growth numbers amid muted private investments.

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Also, despite talks of revenue problems, the government was able to keep its income at the same level as last year in terms of percentage of BE. In fact, the tax income was slightly higher than during April-July of FY19 in this regard, keeping the overall revenue receipts steady. 

Fiscal deficit crosses 77% of budgeted target in first four months of FY20

At Rs 3.4 trillion, tax revenues of the Centre constituted 20.5 per cent of BE in the first four months of FY20 against 19.8 per cent in the last year’s corresponding period.

It is yet to be seen how these tax numbers pan out in August as direct tax collections have dwindled so far in FY20.

Non-tax revenues fell to Rs 44,000 crore, which was 14 per cent of BE, compared to 17.6 per cent a year ago. However, the Rs 1.76 trillion to be transferred by the Reserve Bank of India (RBI) to the Centre would come handy to the government on this count now.

“Transfer from the RBI will help the government attain the fiscal deficit target of 3.3 per cent of GDP during FY20. However, increased expectations of lower GST collections amid slowdown in the economy could exert upward pressure on the fiscal deficit,” said Madan Sabnavis, the chief economist at CARE Ratings.

Non-debt capital receipts, at about Rs 14,000 crore, accounted for 14.2 per cent of BE against 14.7 per cent a year ago. Disinvestment receipts stood at about Rs 12,000 crore, representing 12 per cent of BE — the same as the first four months of the last year.

The government kept its expenditure at about Rs 9.5 trillion, or 34 per cent of BE, in the first four months of FY20 against 36.4 per cent a year ago.

Within that, capex stood at just Rs 1.1 trillion, constituting 31.8 per cent of BE against 37.1 per cent a year ago.

Similarly, revenue expenditure was kept at Rs 8.4 trillion, accounting for 34.3 per cent of BE against 36.3 per cent the previous year. This was despite higher fertiliser subsidies in these four months than a year ago. Revenue expenditure of the Department of Fertilizers constituted 41 per cent of BE in April-July period against 31 per cent a year ago.

After taking out capex, the Centre’s revenue expenditure stood at Rs 4.6 trillion, accounting for 94.1 per cent of BE. By this time last year, this part of the deficit has covered the entire BE as it stood at 106 per cent of the estimates.

Controlling revenue deficit is taken as a better way to check fiscal deficit than capex, which is required for economic growth.