RBI Annual Report 2019-20: Covid-19 Will Increase Fiscal Deficit For Centre, States
An employee holds a stack of electronic payment receipts and Indian Rupee banknotes at a Bharat Petroleum Corp. fuel station. (Photographer: Dhiraj Singh/Bloomberg)

RBI Annual Report 2019-20: Covid-19 Will Increase Fiscal Deficit For Centre, States

The slowdown in economic growth in the last financial year, coupled with the Covid-19 pandemic, is likely to increase the fiscal deficit of central and state governments, according to the Reserve Bank of India.

The general government fiscal deficit is likely to deteriorate to around 7.5% of the gross domestic product in 2019-20, as per provisional accounts, from 6.5% as per the revised estimates, the RBI said in its annual report for 2019-20. That would reverse the fiscal gains achieved in the last two years, it said.

  • In 2018-19, the general government fiscal deficit stood at 5.4% of GDP and outstanding liabilities stood at 67.5% of GDP.
  • This increased to 6.5% of GDP and 70.4% of GDP in 2019-20, respectively, as per the revised estimates.
  • In 2020-21, the fiscal deficit has been budgeted at 5.8% of GDP and outstanding liabilities at 70.5% of GDP.

Most of the estimates for 2020-21 were worked out before the nationwide lockdown that began in late March this year, disrupting economic activity. The RBI sees deficit and debt going much higher now.

Given the shortfall in revenues—a direct fallout of subdued economic activity and increased expenditure requirement to fight the pandemic—the general government fiscal deficit and debt are likely to be materially higher than budgeted.
RBI Annual Report 2019-20

Central Government Finances

In 2019-20, the central government overshot its gross fiscal deficit target by 1.3 percentage points due to lower tax collections amid a slowdown and rationalisation in the corporate tax regime.

It invoked the escape clause in the Fiscal Responsibility and Budget Management Act twice. First, after it reported a fiscal deficit of 3.3% as per the budget estimates; and the second time when it reported a fiscal deficit of 3.8% in the revised estimates.

Direct tax collection fell 7.7% in 2019-20 as per provisional accounts, compared to an increase of 13.4% in 2018-19; while indirect tax collections fell to 1.7% of GDP in 2019-20 from 2.9% of GDP in 2018-19.

Due to the increased expenditure requirement to fight Covid-19, including higher interest expenditure on the back of higher borrowings, a path to return to the FRBM’s prescribed fiscal deficit targets as stated in the Union Budget for 2019-20 would be more challenging, the RBI said.

State Finances

The consolidated fiscal deficit for 25 states deteriorated to 2.8% of GDP in 2019-20 as per revised estimates, compared with 2.3% of the GDP as per the budget estimates.

“This deviation was mainly caused by the economic slowdown leading to lower revenue—both own and central transfers. Under own tax revenue, the decline was pronounced in states’ goods and services tax and taxes on vehicles, which induced cuts in capital expenditure,” the report says.

Though state governments had budgeted a consolidated fiscal deficit of 2.3% of GDP in 2020-21, through higher revenues and lower expenditure, the onset of the Covid-19 pandemic poses a major fiscal challenge to states’ budgets, the RBI says.

“Meeting the fiscal targets budgeted in 2020-21 has become even more challenging due to Covid-19, in view of containment measures and fiscal interventions for providing health infrastructure, helping vulnerable sections of the society and sector specific relief measures,” it says.

The present situation warrants a clear exit strategy with milestones and timelines towards reworking the path towards meeting the FRBM fiscal deficit targets in the coming years, the RBI said.

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