Roaring Covid-19 second wave calls for a fiscal pill

by Manasi Swamy

The Central Government’s fiscal response to the first wave of Covid-19 was quite modest. In May 2020, Prime Minister Narendra Modi announced Atmanirbhar Bharat stimulus package of Rs.21 trillion to fight the Covid-19 crisis. Although this was one of the largest packages announced in the world, it contained little fiscal outgo in 2020-21.

In its revised estimates of expenditure for 2020-21, released on February 1, 2021, the Central Government pegged the growth in expenditure for the fiscal at 28.4 per cent. In absolute terms, this translates into an increase of Rs 7.6 trillion. However, of this increase, Rs.2.4 trillion were spent towards clearing arrears of food subsidy payable to Food Corporation of India (FCI). This settlement of prior-period dues therefore did not contribute towards economic growth in 2020-21. After exclusion of this Central Government’s expenditure growth for 2020-21 reduces to 19.4 per cent.

The government has budgeted to spend Rs.34.8 trillion in 2021-22. This is 8.4 per cent higher than the revised expenditure estimates for 2020-21 excluding the FCI-subsidy arrear clearance. The expenditure growth drops even lower to 3.4 per cent in real terms when adjusted for the 5 per cent inflation projected by the Reserve Bank of India (RBI) for 2021-22.

In nominal terms, revenue expenditure is budgeted to grow by 5.8 per cent to Rs.29.3 trillion and capital expenditure by 26.2 per cent to Rs.5.5 trillion in 2021-22. The growth projected for revenue expenditure is entirely skewed towards interest payments. Interest payments are budgeted to increase by 16.9 per cent to Rs.8.1 trillion, while revenue expenditure excluding interest payments is budgeted to rise by a meagre 2.2 per cent to Rs. 21.2 trillion 2021-22.

The government’s fiscal response to Covid-19 crisis has been quite weak compared to its response to past economic crisis like the recession of 1980 and global liquidity crisis (GLC) of 2008. The Centre had stepped up its expenditure by 24 per cent in 1980-81 to pull the economy out of the 5.2 per cent real GDP contraction it had suffered in 1979-80 because of a severe drought. Expenditure growth was kept high for the next 6 years, averaging 19 per cent per annum.

At the time of GLC too, the Central Government had scaled up its expenditure by 22.2 per cent in 2007-08. It maintained its strong fiscal support in the following three years, with an average expenditure growth of 18.9 per cent per annum between 2008-09 and 2010-11.

This time the government seems to be in a hurry to withdraw fiscal support despite being bullish on its revenue growth for 2021-22. It has budgeted for a 23.4 per cent increase in non-debt receipts to Rs.19.8 trillion in 2021-22. Net tax revenues are budgeted to rise by 14.9 per cent to Rs.15.4 trillion, non-tax revenues by 15.4 per cent to Rs.2.4 trillion and non-debt capital receipts are budgeted to quadruple to Rs.1.9 trillion.

The government seems in a position to achieve its non-debt capital receipts target this year with BPCL stake sale worth Rs.800 billion making progress. The other big stake sale lined up during the year is LIC’s IPO of nearly Rs.1 trillion, which is a relatively safe bet.

The government may outperform its net tax revenue target for 2021-22 if the economy manages to recover to its pre-Covid level as projected by most forecasting agencies. The government itself has projected India’s real GDP to grow by 11 per cent in 2021-22, the RBI expects it to grow by 10.5 per cent and the median projection of 33 professional forecasters is 9.5 per cent. At this growth rate, the government’s budget estimates of a 15.4 per cent rise in net tax collection in nominal terms look quite reasonable. In fact, tax revenues can exceed the budgeted amount if government does not slash excise duty on petrol and diesel during the year. The government has budgeted for a 7.2 per cent contraction in excise duty collections to Rs.3.4 trillion without announcing any rate cuts.

The apprehension here is that the GDP growth projections shared above were made in early April 2021 or some even before that. The second wave of Covid-19 has intensified since then, resulting in tighter curbs in many states. This lends a big negative bias to the GDP projections and therefore the government’s revenue and fiscal deficit estimates too.

In April 2021, India faces the same fiscal dilemma it faced in April 2020. Growth of the economy is threatened once again by the same virus. Infection rates are higher and the healthcare system is again found wanting. Lockdowns have become necessary and so growth projections will be reined in.

The economy got little fiscal support in 2020-21. This year, so far, the government is seen intervening in the financial markets to keep its cost of borrowing down. It does this at the risk of skewing the yield curve and weakening the Indian rupee. A direct fiscal intervention is not evident, yet. The economy is largely left to its own means to find its way out.

By at least one measure, the government does seem to have head room to borrow more and spend more. Central and state government debt as per cent of GDP at 92.5 per cent is still not as high as it was at about 95 per cent between 2002-03 and 2005-06.

Covid-19 cases had dropped to their lowest when the budget was announced. The economy was also showing clear signs of recovery. Now the Covid-19 situation has taken a turn for the worse, making a case for the government to consider a strong fiscal intervention to prop the economy.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
9.1 +2.5
Consumer Sentiments Index
Base September-December 2015
49.1 -1.4
Consumer Expectations Index
Base September-December 2015
51.0 -1.1
Current Economic Conditions Index
Base September-December 2015
46.1 -1.9
Quarterly CapEx Aggregates
(Rs.trillion) Jun 20 Sep 20 Dec 20 Mar 21
New projects 0.96 1.42 1.17 1.62
Completed projects 0.28 0.74 0.84 0.92
Stalled projects 0.11 0.08 0.31 0.14
Revived projects 0.68 0.29 0.15 0.14
Implementation stalled projects 0.09 0.07 0.15 0.30
Updated on: 18 May 2021 8:28PM
Quarterly Financials of Listed Companies
(% change) Jun 20 Sep 20 Dec 20 Mar 21
All listed Companies
 Income -27.7 -6.3 1.6 15.8
 Expenses -27.9 -10.3 0.2 9.8
 Net profit -40.4 47.3 57.3 77.5
 PAT margin (%) 5.2 8.3 8.4 12.2
 Count of Cos. 4,404 4,404 4,378 547
Non-financial Companies
 Income -37.4 -10.5 0.2 20.4
 Expenses -37.7 -14.2 -0.7 14.8
 Net profit -55.9 31.5 53.6 66.8
 PAT margin (%) 4.5 8.1 8.8 12.6
 Net fixed assets 5.9 4.9
 Current assets 0.7 7.7
 Current liabilities -2.7 -5.6
 Borrowings 8.3 -8.0
 Reserves & surplus 4.2 16.8
 Count of Cos. 3,267 3,266 3,252 415
Numbers are net of P&E
Updated on: 18 May 2021 8:29PM
Annual Financials of All Companies
(% change) FY19 FY20 FY21
All Companies
 Income 13.4 0.0 -5.8
 Expenses 13.8 0.0 -6.9
 Net profit 15.2 -10.9 3.5
 PAT margin (%) 2.1 2.1 10.1
 Assets 9.8 8.1 2.4
 Net worth 8.5 4.4 0.7
 RONW (%) 3.8 3.5 11.8
 Count of Cos. 30,903 29,539 49
Non-financial Companies
 Income 14.1 -1.9 -6.6
 Expenses 14.3 -1.6 -7.7
 Net profit 21.7 -21.2 2.0
 PAT margin (%) 2.9 2.4 10.5
 Net fixed assets 5.6 9.4 -0.3
 Net worth 8.0 2.2 -0.1
 RONW (%) 6.4 4.9 13.2
 Debt / Equity (times) 1.0 1.1 0.1
 Interest cover (times) 2.3 2.0 21.1
 Net working capital cycle (days) 73 80 38
 Count of Cos. 24,728 23,541 40
Numbers are net of P&E
Updated on: 11 May 2021 3:39PM