The sharp fall in nominal GDP in the first quarter of the financial year will have its implications on revenue collection and fiscal deficit ratio.
The nominal GDP in the first quarter contracted by 22.6% to Rs 38.08 lakh crore compared to Rs 49.18 lakh crore in the same period last year even as the real GDP declined 23.9% during the quarter.
The drop in nominal GDP, which is GDP calculated at the current price, will be reflected in poor revenue collection. Contraction in nominal GDP shows a demand contraction as it will show in overall tax collections.
"With nominal GDP also showing a negative growth of about 23% in 1QFY21, tax revenues are also likely to contract sharply in the year as a whole," says Dr. D K Srivastava, Chief Policy Advisor, EY India.
It will also further worsen India's fiscal deficit number which is calculated as percentage of the nominal GDP.
This is already evident with tax collection in the April-July 2020 at paltry 2 lakh crore, 41% lower than last year's Rs 3.4 lakh crore during the same period.
The contraction in nominal GDP numbers means India's fiscal deficit ratio calculated as a percentage of nominal GDP will look worse.
The central government had projected the nominal GDP in 2020-21 to be Rs 2.25 lakh crore assuming a 10% growth in it. Based on this estimate, the Centre had projected a fiscal deficit of 3.5%, which would be breached anyway as the government has increased its borrowing in the current financial year by 50% to Rs 12 lakh crore. The Centre funds its fiscal deficit through borrowing.
With economists and experts estimating a 5-10% contraction in GDP in real terms, the nominal GDP could also contract by 2-7% assuming a 3% inflation. With nominal GDP in 2019-20 at Rs 203.5 lakh crore, the same will be around Rs 190-200 lakh crore in the current financial year.
The fiscal deficit till July has already touched Rs 8.2 lakh crore, and even if the government sticks to the revised borrowing limit of Rs 12 lakh crore, the Centre's fiscal deficit alone could be around 6-6.5% of the GDP in the current financial year.