Fiscal Deficit: Designing a Stimulus amid Mounting Slippage

30 APRIL 2020

  • Citi analysts believe that the central government’s fiscal deficit may have reached 4.3% of GDP in FY20, suggesting a further 50bps of slippage from the revised estimate of 3.8% as per Feb20 budget, exceeding the leeway allowed under FRMB.
  • Following nominal GDP growth expectation of 4.4% YoY in FY21 (multi-decade low) and poor tax buoyancy, Citi analysts expect a direct tax shortfall of INR 3.0tn (1.4% of GDP).
  • Despite windfall gains from the fall in crude oil prices, Citi analysts expect the sharp shortfall in GST, import duty, divestment and other non-tax revenues to drive the Center’s fiscal deficit to 6% of GDP in FY21, without considering the impact of a fiscal stimulus.
  • Combined with an estimated State deficit of 4% and the expected fiscal stimulus totaling 1.5-2% of GDP, Citi analysts believe that the combined fiscal deficit may reach 12% of GDP in FY21.
  • *Citi expectation for FY20 and FY21. Source: RBI, Union Budget, CEIC, Citi Research
  • While the first round of fiscal stimulus (0.55% of GDP) focused on the most vulnerable, Citi analysts expect further support in the form of health and humanitarian expenditure, direct income support, credit support to MSMEs and other reforms to help vulnerable industries.
  • While there may be limited investor appetite for sovereign securities, the government may use alternative sources like Tax free COVID-19 bonds, additional dividend and direct monetization from the RBI or a separate temporary Covid-19 Budget to fund the required fiscal stimulus.
  • In the interim, however, the RBI has increased the Ways and Means Advance (WAM) limit for the central and state governments, in addition to increased T-Bill issuances and OMOs.
  • With India’s Public Debt to GDP ratio (~73%) much higher than other BBB- rated economies, Citi analysts highlight the risk of a sovereign rating downgrade to below investment grade by international credit rating agencies.



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