Calling for a growth-oriented Budget, rating agency Icra on Monday warned against sharp fiscal tightening by the Centre and the states as it would temper the economic recovery, and projected a 5 per cent fiscal deficit for the next financial year. For the current financial year 2020-21, it forecasts a 7.5 per cent fiscal gap for the Centre and 4.7 per cent for the states, totalling the combined fiscal deficits at 12.2 per cent.
Sharp fiscal tightening should be avoided in 2021-22 by the Centre and the states as it would temper the weak recovery, and normalising revenue will anyway lower the fiscal strain in the coming year, the agency said in a report. The agency sees the general government's fiscal deficit at 8.5 per cent in 2021-22 -- 5 per cent for the Centre and 3.5 per cent for the states, which would involve a net and gross market borrowings at Rs 16 lakh crore and Rs 20.5 lakh crore, respectively.
But, total liabilities of the Centre are projected to worsen from 49.3 per cent of gross domestic product (GDP) in March 2020 to 59 per cent of GDP in March 2021, before easing mildly to 57 per cent of GDP in March 2022, Icra said in the report. In absolute terms, due to the massive revenue shortage, the Centre''s fiscal deficit will widen to Rs 14.5 lakh crore in 2020-21, added.
In 2021-22, a revenue deficit of 3.5 per cent of GDP and a fiscal deficit of around 5 per cent may allow enough space for prioritising health expenditure, vaccine roll-out as well as capital spending, based on the revenue rebound that is widely expected. Given the continuing uncertainty, tax changes should be avoided at this juncture, and the focus should instead be on maximising disinvestment proceeds, said the report.
In terms of absolute numbers, the rating agency expects a net tax revenue of Rs 15.5 lakh crore, non-tax revenue of Rs 2.5 lakh crore and the disinvestment proceeds of Rs 1.5 lakh crore in 2021-22, the report said. A revenue deficit of 3.5 per cent or Rs 7.8 lakh crore and a fiscal deficit of Rs 11.1 lakh crore will imply a space for revenue expenditure and capital expenditure at Rs 25.8 lakh crore and Rs 4.8 lakh crore, respectively, in 2021-22.
A fiscal deficit of 3.5 per cent of gross state domestic product for the states in 2021-22 may allow them to prioritise a portion of capex that was deferred during the pandemic, the agency said. It added that the deficit will also provide some funds towards projects under the national infrastructure pipeline.
If 90 per cent of the states'' estimated fiscal deficit of Rs 7.8 lakh crore is funded by the market debt, it will suggest a net issuance of Rs 7 lakh crore resulting in a total dated market borrowing of Rs 16 lakh crore for 2021-22. Adding the redemption of G-Sec and state development loans as state market borrowing may indicate substantial gross borrowings of Rs 20.5 lakh crore in 2021-22.
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