Coronavirus Outbreak: India's increased borrowing likely to widen FY21 Budget gap to 5.5%

The increase in annual borrowings to Rs 12 lakh crore ($159 billion) from Rs 7.8 lakh crore previously was necessitated by steep fall in revenue collections and unscheduled spending

By Siddhartha Singh
India’s fiscal deficit is likely to be around 5.5% of gross domestic product for the year ending March 2021 after the government decided to increase its borrowing program to tackle the COVID-19 outbreak, a finance ministry official with knowledge of the matter said.

The increase in annual borrowings to Rs 12 lakh crore ($159 billion) from Rs 7.8 lakh crore previously was necessitated by a steep fall in revenue collections and unscheduled spending including a stimulus package to reverse a slump in the economy, the official said, asking not to be identified citing rules on speaking to the media. But there is no plan by the Reserve Bank of India to buy sovereign debt directly and the government may end up borrowing less than the revised annual estimate, the official added.

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Prime Minister Narendra Modi faces the challenge of lifting an economy that’s poised to contract for the first time in four decades and avert closure of businesses through direct financial aid at a time when tax collections are drying up. Small and mid-sized firms, bearing the brunt of the slowdown in demand, account for about a third of gross domestic product and employ more than 110 million people.

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The higher borrowing program was announced for the full year for the sake of transparency and to end market speculation, the official said.

But the revised numbers weren’t convincing enough for all. A Prasanna, chief economist at ICICI Primary Dealership Ltd. in Mumbai, said the 5.5% fiscal deficit aim appeared unrealistic as growth will slow down sharply, and he instead expects the gap for the current fiscal year to be pegged at 6% of GDP as opposed to the previous aim of 3.5%.

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“It appears that the government is still working with high nominal growth assumptions,” he said. “This could result revenue and deficit assumptions remaining out of sync with ground realities. Such a scenario could eventually result in higher deficit and higher borrowings.”

Late on Friday, the government said it will borrow $159 billion in the year that began April 1, 54% more than budgeted. Half of this will be raised by the end of September. The increase will boost the size of weekly auctions to 300 billion rupees.