NEW DELHI: Monday's relief package shows that the Centre is ready to take a further hit to its fiscal deficit estimates in the current financial year.
The government had a target of keeping the fiscal deficit at 6.8%, but that will now go up after the latest announcements that may entail additional spending (more than what was allocated in the Budget) of anywhere between Rs 1.2 to Rs 1.3 lakh crore.
This additional spending even after factoring in higher dividend by the Reserve Bank of India (RBI) may lead to a higher fiscal deficit in 2020-21. In 2020-21, the government's fiscal deficit was 9.2%.
"Although there are many moving parts at this point, additional expenditures and potentially lower disinvestment suggest a fiscal slip is more likely than not. Hence, we are revising up our fiscal deficit estimate to 7.1% of GDP in FY22, versus the budget estimate of 6.8%," says Nomura in its recent report.
In its report written by MD and chief economist Sonal Verma, Nomura argues that along with the 0.7% of GDP of additional fiscal spending announced so far (measures outlined on Monday along with its estimate of excess spending on free vaccinations), other fiscal headwinds include expected disappointment on disinvestment proceeds (we believe the Rs 1.75 lakh crore or 0.8% of the GDP target is too ambitious), potential hit to revenues in April-June quarter, and the government's likely uncompromising stance on growth-inducing capital spending.
Madhavi Arora, lead economist, Emkay Global Financial Services, says that there is a likelihood of fiscal slippage to the tune of around 0.5% from the initially budgeted 6.8%.
"Despite the slippage, the effective fiscal impulse will still be negative in FY22. Given the limited efficacy of monetary easing currently, continued countercyclical fiscal policy support -- and avoiding a premature consolidation -- remains crucial," she argues.
Recently in its presentation, the newly appointed CII president, and CEO and managing director of Tata Steel had argued that the government should not try to limit its fiscal deficit to 6.8%, and instead try to expand it to 8% for the sake of reviving the economy.
CII has advocated a fiscal package of Rs 3 lakh crore in the current financial year.
It remains to be seen if the government bites the bullet and go for another round of fiscal stimulus.