India’s Budget Gap Breaches Estimate on Poor Tax Collection
(Bloomberg) -- India’s budget gap for the year ended March 31 has touched 4.4% of gross domestic product -- a six-year peak -- breaching the target set in February as an economic slowdown reduced tax collections, people with knowledge of the matter said.
A revenue shortfall of 1.7 trillion rupees ($22 billion) led to the higher deficit number, the people said, asking not to be identified as the figures are not public. Finance Minister Nirmala Sitharaman had targeted a 3.8% gap. A finance ministry spokesman declined to comment.
The budget gap at 4.4% means the federal government might have to suspend a law meant to cap its fiscal deficit, according to Anubhuti Sahay, head of South Asia research at Standard Chartered Bank Plc. That may put the credit rating outlook for India at risk.
The government had suspended it during the global financial crisis, Mumbai-based Sahay said. Fitch Ratings and Standard & Poor’s may change their outlook to negative, she said.
The slippage adds to the challenges faced by Prime Minister Narendra Modi, who is trying to salvage growth that has ground to a halt due to a nationwide lockdown to check the spread of Covid-19.
Tax collections are likely to remain under pressure as the shutdown decimated consumption. A survey by the Confederation of Indian Industry showed most chief executive officers don’t expect demand to revive until September.
A sharp deceleration in growth and a wider fiscal deficit due to the virus outbreak would lead to a large one-time spike in debt levels of around 80% of gross domestic product by the end of this year, according to Sahay, from around 69% currently.
Standard Chartered’s view on the budget gap is somewhat similar to banks such as Citigroup Inc. Economists at the U.S. lender estimate the Indian government’s fiscal deficit will widen to 8% of GDP this year, compared with a budgeted 3.5%. Standard Chartered pegs the FY21 shortfall at 7.3%.
With the pandemic adding to the problem, Citi as well as local financial Services firm Motilal Oswal Financial Services Ltd. see the nation’s combined fiscal gap, including that of states, widening to 12% -- more than double the government’s estimate of 5.9% -- as tax collections falter and states’ pitch in with relief packages for the poor.
Abhijit Banerjee, co-recipient of the Nobel prize for economics in 2019, endorsed the need for a big stimulus package, adding that India should give cash to the poorest 60% of its population. Putting money in the hands of people will spur demand for goods and services offered by medium and small scale industries, he told Rahul Gandhi, a leader of the opposition Congress party, in a video call aired Tuesday.
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