India’s budget target breach signals further blowout in 2020

By Vrishti Beniwal

India missed its fiscal deficit target even before the worst of the coronavirus hit the economy, with the budget set to slide deeper into the red this year.

Suvodeep Rakshit, an analyst at Kotak Institutional Equities in Mumbai, estimates the shortfall could reach 7.2% of gross domestic product in the year through March 2021. That would be the widest since 1991.

The government racked up a budget deficit of 4.6% of GDP in the fiscal year that ended in March, data released Friday showed, higher than the revised target of 3.8% set in February. The shortfall in the budget for the new financial year started April 1 has already touched 35% of the full-year target in the first month.

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“The government’s fiscal position had been weak even before the imposition of the nationwide lockdown,” said Rakshit. “We cannot rule out even further slippages.”

The deterioration in government’s finances follows a protracted period of economic slowdown that hurt revenue collection. With the coronavirus pandemic forcing the nation of 1.3 billion people into a lockdown for more than two months, economic activity has suffered severely and is bound to depress the government’s income from taxes and assets sale.

With the crisis catapulting the economy toward its first full-year contraction in more than four decades and the government loosening its budget to support businesses, the fiscal deficit could widen to 7.4% of GDP, according to Citigroup Inc. The shortfall from India’s 28 states could push the combined deficit to 11.4% of GDP, Citi said.

The wider gap means the government might have to suspend a fiscal law that had required it to bring the deficit down to 3% of GDP by the end of this financial year. It was suspended once before during the global financial crisis more than a decade ago.

Rakshit said a downgrade in the nation’s sovereign rating isn’t an immediate worry. He expects Moody’s Investors Service to lower the rating by one notch, and sees S&P Global Ratings and Fitch Ratings Ltd. cutting their outlook to negative.