Preview: India budget to deal with fallout from COVID-19 pandemic, says Barclays

India will present a budget that has to deal with the economic fallout from the COVID-19 pandemic. Barclays expect the budget to prioritize reviving growth.

The Covid-19 pandemic and its accompanying economic damage will have a multi-year effect on India’s fiscal profile. FY21-22 will begin the repair work. Finance Minister Nirmala Sitharaman faces the task of balancing support to the economy as India aims for a rapid return to growth against signalling a commitment to fiscal consolidation over the longer term. Barclays forecast that India’s consolidated fiscal deficit will reach 14% of GDP (central: 7.7%; state governments: 5.0%; off-balance sheet items: 1.3%) during FY 20-21, and decline only gradually over the next five years, with the government likely to prioritize reviving growth in the near term.

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Barclays expects central government revenues to decline Rs 3.5 trn in FY 20-21 and expenditures to rise Rs 3 trn relative to projections made in the February 2020 budget, widening the fiscal deficit to Rs 15.2 trn, or 7.7% of GDP. However, we expect revenues to rebound in FY 21-22, rising to Rs 20.5 trn, or 9.2% of GDP, which should afford the government fiscal room to support the economy’s recovery. Barclays expects the central government to propose a fiscal deficit of Rs 12.2 trn, or 5.5% of GDP, in FY 21-22, which Barclays estimate would allow the government to raise spending to over Rs 34.7 trn.

With reviving growth the priority, deficit reduction is likely to be gradual over the next few years. Barclays estimated the elevated deficit could increase India’s public debt by 15pp in FY 20-21, taking it to 87% of GDP. Barclays analysis suggests that debt sustainability requires boosting GDP growth back to pre-Covid levels, rather than emphasizing fiscal prudence. Barclays estimates a 2% boost to GDP growth reduces the debt-to-GDP ratio by 11pp over a 10-year horizon, while a 1% rise in fiscal deficit only increases it by 3pp over the same period.
Central government deficit to reach 7.7% in FY 20-21:

During the Covid-19 crisis, the government announced several measures to support the economy. The cautious attitude of the government towards spending under the Atmanirbhar Bharat (“Self-reliant India'') campaign has been criticized. However, in our view, the solid rebound of the economy in the last two quarters justify the government’s approach of adding stimulus only gradually, especially given the already stretched fiscal position.

Through its four fiscal stimulus packages announced in March, May, October and November, Barclays now believe India’s consolidated fiscal deficit could rise to as much as 14% of GDP for fiscal year 20-21, up from our previous estimate of 13.0% of GDP. Barclays expects the central government’s fiscal deficit is likely to reach 7.7% of GDP from 4.6% in FY19-20. In addition, Barclays expect the states to record an aggregate deficit of 5.0% of GDP , in line with the central government’s relaxed rules for state finances, while off-balance-sheet items are likely to register a deficit of at least 1.3% of GDP.