Global credit rating agency Fitch has revised India’s FY21 central government fiscal deficit forecast to 8.2 percent of GDP from 7.2 percent due to higher than anticipated willingness of govt to spend amid weak revenue collection.
The rating agency also forecasts total government deficit including the state deficit for FY21 at 11.8 percent of GDP.
This is due to a quicker than previously anticipated divergence in expenditures and non-debt receipts, which saw the deficit exceed the full year target in only four months, Fitch said.
Fitch expects the government to maintain its spending expansion through increased government securities issuances, which would be absorbed by the banking sector under an increased Statutory Liquidity Ratio threshold up to March 31, 2021, which allows more funds to be invested in these securities.
The Reserve Bank of India’s (RBI) announcement that the Statutory Liquidity Ratio (SLR) for banks will be raised to 22 percent of net demand and time liabilities (NDTL), up to March 31 2021, from 18 percent at present, leads that the government will seek to ramp up its borrowing through bond issuances over the coming months, with local banks being the bulk of the lenders, the agency noted.
The FY21 central government expenditure forecasts has been revised to 12.7 percent over FY20 revised estimates, from 6.5 percent previously. This is on the back of the centre’s commitment to maintain spending despite a wide revenue shortfall, with spending maintained by additional market borrowing.
"We expect the Centre’s reliance on market borrowing to persist through FY21, and forecast public debt as a share of GDP to rise to 86.7% this fiscal year" Fitch said.
The central government's revenue collection over the first four months of FY21 suffered a major hit as a result of a slump in economic activity in light of the nationwide Covid-19 induced lockdown from March 25 to May 31.
However, Fitch expects a gradual recovery in the economy over the coming months to support an improvement in revenue collection.
Non-debt receipts over the first four months of FY21 amounted to Rs 2.3 lakh crore, a 42 percent YoY decline over FY20, it said.