CEA Krishnamurthy Subramanian sees FY21 fiscal deficit at over 5% | Business Standard News

Clipped from: https://www.business-standard.com

No doubt that economy will contract in Q1, Krishnamurthy Subramanian says

The centre has decided to borrow Rs 4.2 trillion more than budgeted for FY21, taking its total gross borrowing to Rs 12 trillion

The Centre’s fiscal deficit in 2020-21, as things stand now, could be 1.7-1.8 percentage points higher than the 3.5 per cent of gross domestic product, which was targeted in the Budget, Chief Economic Advisor Krishnamurthy Subramanian has told Business Standard.

He also said there would a contraction in GDP in the April-June quarter. Such an increase would take the

fiscal deficit for the year to 5.2-5.3 per cent of GDP if the underlying assumption of 10 per cent nominal GDP growth stays constant.

“Given the 50 per cent or thereabouts increase in borrowing that has been announced, it is a reasonable estimate to say that at this time, an increase in the budgeted fiscal deficit target is being anticipated,” Subramanian said in an interaction with this paper.

He added that like most other projections, this too could be revised, given the uncertainty surrounding the Covid-19 pandemic, the nationwide lockdown, and their impact on the economy and the Centre’s finances.

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ALSO READ: Why Centre is left with little fiscal cushion to deal with Covid pandemic

The Centre has decided to borrow Rs 4.2 trillion more than what was budgeted for FY21, taking its gross borrowing to Rs 12 trillion. The states have also been given room for an additional borrowing ofRs 4.3 trillion by allowing them to borrow up to 5 per cent of their GSDP from the earlier 3 per cent.

Borrowing is used to fund the gap between expenditure and revenue. With the Centre and states desperately short of revenue and their expenditure commitments increasing due to the pandemic, experts including former CEA Arvind Subramanian expect the general government’s (Centre plus states) fiscal deficit to go into double digits as a percentage of GDP, compared to the 6 per cent which the Fiscal Responsibility and Budget Management framework mandates.

For FY20, the fiscal deficit came in at 4.6 per cent of GDP, compared with the revised estimate of 3.8 per cent and the Budget estimate of 3.3 per cent. It had breached the 0.5 per cent escape clause, which the FRBM Act allows.

When asked what his forecasts for growth in the April-June quarter and 2020-21 were, Subramanian said: “In the first quarter there will be a perceptible contraction.”

“In the early weeks of the lockdown, we had estimated GDP growth for the year to be 1.5-2 per cent. I think now there are downside risks to that. How deep the risks are depends upon whether or not we see a recovery in the latter half of the year,” Subramanian said.

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