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India’s Fiscal Deficit To Widen Further In FY21: Fitch Solutions

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India’s Fiscal Deficit To Widen Further In FY21: Fitch Solutions
Aparajita Gupta - 01 April 2020
New Delhi, April 1: Fitch Solutions has revised its forecast for India’s FY2020/21 (April – March) fiscal deficit and stated it will widen to 6.2 per cent of GDP, from 3.8 per cent of GDP previously, which reflects that the government will miss its initial target of 3.5 per cent by a wider margin.
“Underpinning our revised forecast is weaker revenue collection as a result of a sharp virus-driven downturn in economic activity and higher expenditures aimed at softening COVID-19’s economic shock,” it stated.
Weak economic activity will likely see a revenue collection contract on a year-on-year basis in FY2020/21.
“Accordingly, we have revised our forecast for receipts to contract by 1 per cent, from growth of 11.8 per cent previously. We have revised our FY2020/21 real GDP growth forecast to 4.6 per cent, from 5.4 per cent previously, to reflect our view for growth to weaken further from our estimate of 4.9 per cent in FY2019/20 due to both economic disruptions due to domestic movement restrictions and weak global demand,” said Fitch Solutions.
It added, “We flag that risks to our growth forecast are still weighted to the downside due to the evolving COVID-19 pandemic. The Indian government has declared a 21-day nationwide lockdown, which started on March 25. The rushed implementation of the lockdown which gave its citizens only a few hours to prepare has reportedly caused many rural migrants in the cities to be left without food and shelter, prompting them to return to their villages, either on the last remaining carriers or on foot. We highlight that the mass migration of such workers, as seen on news media footage, raises a significant risk of a larger COVID-19 outbreak across the country. To be sure, the rural areas reportedly have fewer COVID-19 cases versus the cities as of end-March (although we think that this could be due to poor monitoring capabilities), and the perceived safety of the rural areas has given another reason for the migrant workers to return home. As such, we see virus-led economic disruptions extending for several quarters, which will weigh heavily on personal and corporate income tax collections for the year.”
At the same time, Fitch Solutions expects expenditures to surge as the government responds to the COVID-19 crisis both on an economic and social front over FY2020/21. It also expects government debt to rise significantly as a result of this COVID-19 crisis.
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