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The government will need to weather the additional pressure on its fiscal health as it foots the bill of providing free food to the most vulnerable and free vaccines for its citizens. Such measures may seem like an added burden on the Centre’s budget but will give outsized benefits through an improvement in economic growth recovery.

The government recently announced that it would extend its free food distribution programme further in the wake of the second wave. It also changed its decentralized vaccination policy and will now procure 75% of the vaccines to distribute free to its citizens.

Economists estimate that both these measures will lead to an additional spending of 0.4-0.5% of gross domestic product (GDP). This indeed is an added pain to an already stretched budget for the Centre. Nomura analysts believe that the budgeted fiscal deficit of 6.8% of GDP will be breached in FY22.

Bill for growth
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Bill for growth

The silver lining is that the government has got a larger-than-budgeted dividend transfer from the Reserve Bank of India (RBI). The central bank transferred 99,142 crore against a budgeted 53,500 crore. Further, its indirect tax collections have managed to remain reasonably strong despite the second wave disruptions. Goods and services tax collections were above 1 trillion in May.

RBI has even committed to support the Centre should it need to borrow more from the market. More importantly, the effects of speedy vaccination on growth could offset some of the short-term fiscal pain. The speed and intensity of recovery are directly tied to the speed of vaccination. As more Indians get inoculated, the need for lockdowns would reduce considerably and economic activity would speed up. As such, high-frequency data already shows an improvement in activity from June onwards. All of this leads to higher tax revenues for the government.

Meanwhile, the government needs to get more out of its disinvestment plan to avoid the risk of its fiscal deficit hurting the country’s sovereign rating. Indeed, a rising debt burden would risk the event of a downgrade from rating agencies. “With India already at the cliff edge of a rating downgrade, we remain alert to possible rating action towards the year-end or early next year, as fiscal risks become more evident," wrote analysts at Nomura in a note.

What works in India’s favour is that most emerging market economies have seen their fiscal position get stretched and debt load increase. Ergo, India won’t stick out like a sour thumb among economies. Further, rating agencies would take cognizance of the fact that the pandemic has meant that fiscal burden would increase, and a sudden rating downgrade may not be warranted. Even so, analysts believe this risk should be kept in mind.The government will need to weather the additional pressure on its fiscal health as it foots the bill of providing free food to the most vulnerable and free vaccines for its citizens. Such measures may seem like an added burden on the Centre’s budget but will give outsized benefits through an improvement in economic growth recovery.

The government recently announced that it would extend its free food distribution programme further in the wake of the second wave. It also changed its decentralized vaccination policy and will now procure 75% of the vaccines to distribute free to its citizens.

Economists estimate that both these measures will lead to an additional spending of 0.4-0.5% of gross domestic product (GDP). This indeed is an added pain to an already stretched budget for the Centre. Nomura analysts believe that the budgeted fiscal deficit of 6.8% of GDP will be breached in FY22.

The silver lining is that the government has got a larger-than-budgeted dividend transfer from the Reserve Bank of India (RBI). The central bank transferred 99,142 crore against a budgeted 53,500 crore. Further, its indirect tax collections have managed to remain reasonably strong despite the second wave disruptions. Goods and services tax collections were above 1 trillion in May.

RBI has even committed to support the Centre should it need to borrow more from the market. More importantly, the effects of speedy vaccination on growth could offset some of the short-term fiscal pain. The speed and intensity of recovery are directly tied to the speed of vaccination. As more Indians get inoculated, the need for lockdowns would reduce considerably and economic activity would speed up. As such, high-frequency data already shows an improvement in activity from June onwards. All of this leads to higher tax revenues for the government.

Meanwhile, the government needs to get more out of its disinvestment plan to avoid the risk of its fiscal deficit hurting the country’s sovereign rating. Indeed, a rising debt burden would risk the event of a downgrade from rating agencies. “With India already at the cliff edge of a rating downgrade, we remain alert to possible rating action towards the year-end or early next year, as fiscal risks become more evident," wrote analysts at Nomura in a note.

What works in India’s favour is that most emerging market economies have seen their fiscal position get stretched and debt load increase. Ergo, India won’t stick out like a sour thumb among economies. Further, rating agencies would take cognizance of the fact that the pandemic has meant that fiscal burden would increase, and a sudden rating downgrade may not be warranted. Even so, analysts believe this risk should be kept in mind.

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