New Delhi (31.07.2021): Even though the second wave of the Covid pandemic hasn't been as severe as the first wave, the government's finance managers don't have much to cheer about. Since the government's finances depend much on both direct and indirect taxes, the official news announced on Friday of a deceleration in the output of eight core industries to 8.9 percent in June couldn't have lifted the gloom over the FinMin despite the good news of near-normal Monsoon all over the country. However, because of the higher core sector output at 16.3% in May and 60.9% in April, the overall financial position of the central government swung up in Q1FY22 Vs Q1FY21: revenues rose, fiscal deficit declined, and developmental expenditure expanded. Although both Q1FY22 and Q1FY21 were marked by lockdowns, restrictions on movement, and closure of businesses, the pandemic's impact were limited to specific regions this year and there was no national lockdown. Nevertheless, the national economy has been functioning at the sub-optimal level, triggering unemployment and contraction in demand. This means that government finances may continue to be stressed even as the requirement for more funds to mitigate the effects of the pandemic may escalate on top of the revenue already lost since the last year. So the government may be constrained to resort to deficit financing, which, if not used for growth and development, could fuel inflation. In its latest update on government finances, Care Rating has this to say: "With the gradual lifting of restrictions across regions, economic activity could see a pickup in the ensuing months. This would bode well for government finances. However, this premise is contingent on the pandemic being reined in. There is ample uncertainty on this count. For 2021-22, the central government has budgeted the fiscal deficit at Rs. 15.06 lakh crores and at 6.8% of GDP. The fund shortfall (due to additional expenditure and loss of revenue due to lockdown) would push up the fiscal deficit to between Rs. 17.38 lakh crore to Rs. 17.68 lakh crore. For a nominal GDP of Rs. 222.9 lakh crore, the increased quantum of the fiscal deficit would potentially push up the fiscal deficit to 7.8-7.9% of GDP, which is a 1% to 1.1% increase over the budget estimate." (By MK Shukla & Rakesh Ranjan)
Govt. finances face the stress of uncertainty
By MK Shukla & Rakesh Ranjan - 2021-07-31 13:35:00
New Delhi (31.07.2021): Even though the second wave of the Covid pandemic hasn't been as severe as the first wave, the government's finance managers don't have much to cheer about.
Since the government's finances depend much on both direct and indirect taxes, the official news announced on Friday of a deceleration in the output of eight core industries to 8.9 percent in June couldn't have lifted the gloom over the FinMin despite the good news of near-normal Monsoon all over the country.
However, because of the higher core sector output at 16.3% in May and 60.9% in April, the overall financial position of the central government swung up in Q1FY22 Vs Q1FY21: revenues rose, fiscal deficit declined, and developmental expenditure expanded.
Although both Q1FY22 and Q1FY21 were marked by lockdowns, restrictions on movement, and closure of businesses, the pandemic's impact were limited to specific regions this year and there was no national lockdown.
Nevertheless, the national economy has been functioning at the sub-optimal level, triggering unemployment and contraction in demand. This means that government finances may continue to be stressed even as the requirement for more funds to mitigate the effects of the pandemic may escalate on top of the revenue already lost since the last year.
So the government may be constrained to resort to deficit financing, which, if not used for growth and development, could fuel inflation.
In its latest update on government finances, Care Rating has this to say: "With the gradual lifting of restrictions across regions, economic activity could see a pickup in the ensuing months. This would bode well for government finances. However, this premise is contingent on the pandemic being reined in. There is ample uncertainty on this count.
For 2021-22, the central government has budgeted the fiscal deficit at Rs. 15.06 lakh crores and at 6.8% of GDP. The fund shortfall (due to additional expenditure and loss of revenue due to lockdown) would push up the fiscal deficit to between Rs. 17.38 lakh crore to Rs. 17.68 lakh crore. For a nominal GDP of Rs. 222.9 lakh crore, the increased quantum of the fiscal deficit would potentially push up the fiscal deficit to 7.8-7.9% of GDP, which is a 1% to 1.1% increase over the budget estimate."
(By MK Shukla & Rakesh Ranjan)
